U.S. Treasuries and related exchange traded funds are retreating with government bond yields hitting multi-year highs, as traders look beyond the safety bets from the Russia-Ukraine war and refocus on the Federal Reserve’s interest rate cuts.
On Monday, the iShares 7-10 Year Treasury Bond ETF (IEF) fell 1.0% and the iShares 20+ Year Treasury Bond ETF (NasdaqGS: TLT) declined 2.0%. Meanwhile, yields on benchmark 10-year Treasury notes rose to 2.126%, the highest level since 2019, while yields on 30-year Treasuries increased to 2.468%. Bond yields and prices have an inverse relationship.
Treasury bond yields had initially climbed earlier in 2022 as investors raised bets on multiple interest rate hikes out of the Fed this year in response to the surge in inflation. The 10-year yields then retreated to as low as 1.722% as Russia’s invasion of Ukraine sent investors scrambling for safety.
However, government bonds have plunged and yields have jumped over the past week as the increasingly isolated Russian economy fueled a surge in crude oil prices and further flamed inflation concerns, adding to pressure for the Fed to tighten its monetary policy.
It is hard to say that recent developments “are not inflationary, given where commodity prices are,” Leah Traub, a portfolio manager at Lord Abbett, told the Wall Street Journal.
While some believe that higher commodity prices could weigh on growth and cause the Fed to take a second look over hiking rates, “our view is, that for the U.S., that the inflation impact will be higher than any negative impacts from growth,” Traub added.
In the options market, traders are already close to pricing in seven standard quarter-point rate hikes for 2022, Bloomberg reports.
Looking further out, investors are largely anticipating the Fed to sharply slow its pace of rate hikes next year, which could leave short-term rates between around 2% and 2.5%, or roughly the same level reached in the previous economic expansion.
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