Bond Report: 2-year Treasury rate rises to nearly two-year high, as long-dated yields edge back to start final week of 2021

What are yields doing?

• The 10-year Treasury note yields
  TMUBMUSD10Y,
  1.479%
  was at 1.480%, down 1.2 basis points from 1.492% at 3 p.m. Eastern Time on Thursday. Yields for debt fall as prices rise.

• The 30-year Treasury bond rate
  TMUBMUSD30Y,
  1.886%
  was at 1.885%, off 2.1 basis points from 1.906% on Thursday.

• The 2-year Treasury note yield
  TMUBMUSD02Y,
  0.704%
  was at 0.707%, up 2.1 basis points from 0.686%. The note finished at the highest rate since March 3, 2020, according to Dow Jones Market Data.

What’s driving the market?

The 2-year Treasury note rose to its highest rate since March of 2020, aided by a poor auction, while long-dated yields for government debt edged lower and prices higher. Trading in government debt on the day came as the S&P 500
SPX,
+1.38%
was headed toward a fresh record Monday, following its 68th record close on Thursday.

Concerns over omicron and its spread continued to color the mood on Wall Street on Monday.

White House medical adviser Dr. Anthony Fauci warned against complacency over the variant, which he said could end up swamping hospitals even if many infections appear mild. However, investors behaviors on Monday signal they may be more concerned over the longer-term outlook for economic expansion than the near-term risks caused by omicron and the COVID pandemic.

The uptrend in stocks has been partly supported by the perception that omicron isn’t as severe as other variants of coronavirus, and that it won’t disrupt the economic expansion seen despite the viral outbreak spanning nearly two years.

Worries about the epidemic come as data released on Thursday showed that the Federal Reserve’s preferred inflation gauge, the 12-month increase in the PCE index, jumped to 5.7% in November from 5% in the prior month. That is the highest rate since 1982.

Rising prices chip away at the fixed value of bonds, but Treasurys have drawn some bids because there is uncertainty about the impact on the economy from the Fed’s monetary policy plans, which include tapering asset purchases and eventually lifting rates. Some strategists fear a policy error.

Meanwhile, poor liquidity and tepid demand during the holiday stretch were blamed for a weak $56 billion auction of notes two-year notes on Monday, with yields of shorter-dated bonds headed higher.

What strategists are saying

• “Today’s 2-year note auction stopped 0.6 [basis points] above where the [when issue] was bid at 1:00 [p.m.] at 0.769%, wrote Jefferies economists Thomas Simons and Aneta Markowska, in a Monday note. “Tails in 2-year auctions have historically been rare in 2-year note auctions…The auction process has become somewhat messier as yields have been heading higher.”