Treasury Bond ETFs Slide as Traders Anticipate Tighter Monetary Policy

Treasury bond exchange traded funds retreated with yields on benchmark 10-year notes hitting their highest level since June as traders continued to adjust to the central bank’s policy outlook.

On Tuesday, the iShares 7-10 Year Treasury Bond ETF (IEF) fell 0.3%, and the iShares 20+ Year Treasury Bond ETF (NasdaqGS: TLT) decreased 1.2%. Yields on benchmark 10-year Treasury notes rose to 1.532%, while yields on 30-year Treasuries were at 2.065%. Bond yields and prices have an inverse relationship.

“People are realizing, or at least remembering, that central banks are going to have to start raising rates,” Altaf Kassam, head of investment strategy for State Street Global Advisors in Europe, told the Wall Street Journal. “The patient has become used to being given all these drugs, but soon those drugs are going to have to be reduced.”

Federal Reserve Chairman Jerome Powell told the Senate on Tuesday that higher inflation may last longer than anticipated, CNBC reports.

The Fed signaled last week that it may soon begin paring back its pandemic-era asset purchases. The central bank’s updated economic projections also revealed that half of the major Fed officials are eyeing a rate hike as soon as 2022.

The more hawkish tone from the Fed has contributed to a rise in Treasury yields across the time curve.

“Focus now turns towards the all-important mid-1.50% range, which is the trendline from the highs in the 10-year yield from back in late March. If economic and inflation data is solid this week, and the 10-year yield can breakthrough the mid-1.50% range and close near (or above) 1.60% this week, investors will look for a continuation of the rise in yields back to that March high of 1.74%,” Tom Essaye of the Sevens Report said in a note to clients.

Calls for monetary policy tightening have come from the Fed and other central banks as market observers remain cautious about rising inflation. For example, rising energy prices across Europe have been a recent growing concern.

“It’s quite clear that a global hiking cycle had already started before the recent mini energy crisis. Will this renewed spike in energy costs mean central banks accelerate this … or will it hit demand enough that it actually slows them down? This is an incredibly delicate and difficult period for central banks,” Deutsche Bank’s Jim Reid said in a note.

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