Long-Term Treasury Yields Ease After Jumping to 16-Year Highs

Long-term government bond yields stabilized in the U.S. (-2 basis points week-over-week for the 10-year Treasury yield at 4.23%) while the 2-year yield closed 14 basis points higher at 5.08% (10-2 Year Treasury yield spread at -0.85%). Yet, the 10-year yield had started the week on the front foot, surging to a more than 16-year high above 4.35% as investors anticipated Federal Reserve Chair Powell’s hawkish tone at the Jackson Hole symposium. However, it sharply declined later in the week, disregarding Powell's cautionary remarks about potential interest rate increases. Traders brushed aside rate hike concerns, concentrating on Powell's optimistic remarks lauding robust economic expansion. Financial markets could find solace in Powell's recognition of positive inflation data, suggesting interest rates are unlikely to move higher in the coming months. The greenback surged to three-month highs (104.15), up 0.80% for the week, in the wake of Powell’s speech.

In Europe, Treasury yields eased with the German 10-year Bund at 2.56% (-6 bps) and French 10-year OAT at 3.08% (-9 bps). The 3-month Euribor rate slid from 3.82% to 3.79%.

The positive backdrop pushed investment grade corporate bond prices higher. In Europe, the IBOXX € Liquid Corporates index edged up 0.26%, snapping a three-week losing streak. In the U.S., the IBOXX $ Domestic Corporates index gained 0.41%, after five negative weeks in a row.

High yield bonds followed suit, up 0.27% in Europe (IBOXX € Liquid High Yield Index) and up 0.51% in the U.S. (Markit iBoxx USD Liquid High Yield Capped Index). Emerging debt in local currencies rebounded the most (+1.02%) after losing 3.58% over the last three weeks.