Treasury yields jump as U.S. deficit and inflation come in focus

Treasury yields jump as U.S. deficit and inflation come in focus

Treasury yields spiked for a second session on Monday as traders focused on the prospects of continued federal deficits after November’s presidential election and structurally higher inflation.

What’s happening

• The yield on the 2-year Treasury was 4.762%, up 4.4 basis points from 4.718% on Friday. Yields move in the opposite direction to prices.
• The yield on the 10-year Treasury was 4.447%, up 10.5 basis points from 4.342% on Friday. The benchmark 10-year Treasury rose 15 basis points during the second quarter.
• The yield on the 30-year Treasury was 4.615%, up 11.3 basis points from 4.502% on Friday.

What’s driving markets

The Nov. 5 U.S. presidential election remained in focus on Monday as traders weighed the fiscal outlook under either President Biden or Republican challenger Donald Trump. The concern is that bigger federal deficits would likely be on the way if either candidate wins.

Read: Bond market participants brace for bigger deficits under either Trump or Biden

In data released on Monday, a key barometer of U.S. factory activity known as the ISM’s manufacturing index fell in June for the third month in a row. The index slipped to 48.5% in June from 48.7% in the prior month, remaining below the 50% level that reflects a shrinking manufacturing sector.

The bond market closes early on Wednesday, in advance of the Fourth of July holiday on Thursday. The week ends with Friday’s release of the June’s nonfarm payrolls report.

“Inflation has reset higher due to structural changes in the U.S. economy,” said Craig Brothers, a senior portfolio manager and co-head of fixed income at Bel Air Investment Advisors in Los Angeles, which oversees and manages more than $10 billion in assets.

“The Fed’s attempt to tighten financial conditions with higher interest rates has been offset with government stimulus bills and record federal budget deficits,” Brothers wrote in an email. “The reduction in demand for U.S. Treasury bonds coupled with persistent inflation has raised the floor on Treasury rates. The Federal Reserve will face a dilemma on interest-rate cuts when employment moves above 4.5% and inflation remains sticky above 3.0%.”