Treasury Yields Rise for the Sixth Straight Week

U.S. Treasury yields rose for the sixth week in a row. The 10-year benchmark rate hit its highest level since November, climbing to 4.09% on Thursday before moving back to 3.96% on Friday. The 2-year yield closed at 4.86% on Friday after reaching its highest level (4.94%) since 2007. The yield curve inversion widened again (90 basis points), signaling more recession worries. Investors are now forecasting the Federal Reserve to lift rates to a terminal rate as high as 5.44%. Yet Governor Christopher Waller said that “if payroll and inflation data reports continue to come in too hot, the policy target range will have to be raised this year even more to ensure that we do not lose the momentum that was in place before the data for January were released.”

In the eurozone, the yield on the benchmark German 10-year bond jumped to a 12-year high of 2.72% (+18 basis points week-over-week) after European Central Bank President Christine Lagarde set the table for a 50-basis point rate hike in March. ECB Chief Economist Philip Lane added ECB officials will not end rate hikes until they are confident price growth is heading back towards its 2% medium-term target. Notwithstanding these hawkish messages, the ECB should assess the risk that prolonged tightening can hurt the EU economy more than necessary. Several investment banks have recently revised their forecasts for the ECB's terminal rate to 4% as inflationary pressures weigh. That said, to what extent would it make sense to push the terminal rate up to 4% if the Core HICP inflation forecast for 2024 stands at 2.8%? Bearing in mind that it will take months before it is clear how the ECB’s moves have affected the economy.