Two-Year Treasury Yields Erase Omicron Drop on Hawkish Fed Bets
(Bloomberg) -- Two-year Treasury yields have erased their post-Thanksgiving tumble as traders bet the omicron impact on the U.S. economy won’t delay Federal Reserve rate hikes.
The yield on the short-dated notes closed at 0.69% Tuesday -- the highest since March 2020 -- having rallied some 25 basis points from last week’s low as investor fears about the new coronavirus variant abated. The benchmark 10-year yield remains more than 20 basis points below its Thanksgiving peak.
The prospect of tighter Fed policy -- with a rate hike priced in for June -- is pressuring the shorter-end of the bond market. Risk sentiment is reviving as investors bet the economy can shake off the virus impact and traders look ahead to Friday’s inflation data and next week’s Fed meeting.
“Receding concerns about the threat of the omicron variant strengthen the case for the FOMC to announce faster tapering this month,” said Winson Phoon, head of fixed-income research at Maybank Kim Eng Securities in Singapore. That “opens the door for an earlier rate hike in 2022.”
Still, while Fed Chair Jerome Powell’s hawkish shift last week revived bets on early rate hikes, a flattening yield curve points to worries they will end up choking growth. The spread between five-year and 30-year Treasury yields has narrowed to the least since March 2020.
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