Selloff in Treasuries

The yield on the benchmark 10-year Treasury note ascended to its highest level since mid-March, near the 3.7% threshold, capping off the week with an uptick of approximately 22 basis points. Concurrently, the yield on the 2-year Treasury note surged by 28 basis points, reaching 4.28% from its previous 4.00%. This pronounced spike can be largely attributed to mounting conjecture that the Federal Reserve might ultimately find it necessary to implement yet another interest rate hike, owing to the persistent spectre of inflation.

Uncertainty surrounds the forthcoming monetary policy decision, as the proposition of a pause in the tightening trajectory next month is now cast into doubt, as affirmed by Lorie Logan, President of the Federal Reserve Bank of Dallas. Such comments from an influential Fed official served to bolster the market sentiment reflecting scepticism towards a halt in the rate normalization process. On the other hand, Federal Reserve Governor and Vice Chair nominee Philip Jefferson conveyed a more measured approach, expressing a willingness to observe and gauge the repercussions of policy tightening on the economy.

Nevertheless, beneath the surface of these interest rate movements lies a distinct probability that investors are offloading their holdings of government securities, encompassing Treasury bills and T-bonds, particularly in the shorter duration of the 2-year bond. This strategic divestment stems from apprehension surrounding the distant but conceivable outcome of a failure to raise the debt ceiling, resulting in a potential default by the US government. It is this overarching concern that has precipitated the sudden fluctuation in interest rates, underscoring the significance of the ongoing political negotiations surrounding the nation's fiscal stability.

In Europe, the yield on the German 10-year Bund followed the same trend, rising from 2.28% to 2.43%.

Against this backdrop, investment grade corporate bonds closed in the red. In Europe, the IBOXX € Liquid Corporates index lost 0.94%. In the U.S., the IBOXX iShares $ Investment Grade Corporate Bond Index fell for a third consecutive week (down 1.39%).

High-yield bonds edged up 0.26% in Europe (IBOXX € Liquid High Yield Index) but edged down 0.38% in the U.S. (Markit iBoxx USD Liquid High Yield Capped Index).

Emerging debt in local currencies was down 0.23% while the dollar index continued to gain momentum above the 103 level.