Bond Report: U.S. Treasury yields fall to lowest in more than a week, as Austria’s COVID-19 lockdown unnerves markets

United States

Yields for U.S. government debt headed sharply lower Friday morning to end the final full week of trading in November before the Thanksgiving holiday next Thursday.

Bonds caught a bid amid reports that Austria is imposing a lockdown to mitigate the spread of COVID-19, and Germany has not ruled out similar measures.

Comments by one Federal Reserve policy maker on the need to possibly pivot to a faster tapering of bond purchases partly because of high inflation, still wasn’t enough to give yields a boost.

What are yields doing?
  • The 10-year Treasury note TMUBMUSD10Y, 1.537% yields 1.531%, down from 1.586% at 3 p.m. Eastern Time on Thursday.
  • The 30-year Treasury TMUBMUSD30Y, 1.919%, known as the long bond, was yielding 1.915%, compared with 1.971% a day ago.
  • The 2-year Treasury note rate TMUBMUSD02Y, 0.472% was at 0.456%, down from 0.500% on Thursday.
What’s driving the market?

Yields continued to decline further on Friday as rising COVID cases in the U.S. and Austria’s lockdown sparked a flight toward the perceived safety of government debt, driving yields down and prices higher.

Reports indicate that the U.S. has been seeing a surge in cases in the Upper Midwest, with a busy travel season about to begin ahead of next Thursday’s Thanksgiving holiday.

Meanwhile, the Austrian government announced a nationwide lockdown starting Monday for up to 20 days, and would require its people to get vaccinated starting Feb. 1. Germany’s health minister Jens Spahn reportedly said on Friday that lockdowns couldn’t be ruled out in his country, with cases rising sharply this week.

A measure of German wholesale inflation jumped 3.8%, compared with forecasts for 2.3%. The move in producer inflation on an annualized basis rose to 18.4%, exceeding average economists’ estimates for 15.7%.

Against that backdrop, European Central Bank leader Christine Lagarde reiterated European policy makers’ assurances that it will likely keep accommodative monetary policies in place as the global economy wrangles with surging prices and an uneven recovery from the COVID-19 pandemic.

However, Lagarde still repeated the notion that surging inflation in much of the world is likely a fleeting phenomenon.

“Today, I will argue that those drivers are likely to fade over the medium term, which is the horizon that matters for monetary policy. And, because they largely stem from the supply side and energy prices, they will probably slow the pace of the recovery in the near term,” she said, during a speech at the 31st Frankfurt European Banking Congress.

Back in the U.S., Fed Gov. Christopher Waller said the U.S. central bank may need to pivot to a faster tapering of its bond purchase program. In a speech to the Center for Financial Stability, he described the high inflation seen this year as a “big snowfall that will stay on the ground for a while” rather than a one-inch dusting.

Separately, the market is waiting for President Joe Biden to finalize his decision on nominating the Fed’s next leader, with current Chairman Jerome Powell in the running against Fed Gov. Lael Brainard to help lead the economy out of the current phase of the rebound from the pandemic.

Analysts have attributed some of this week’s retreat in bond yields to technical factors, with Treasury prices due for a bounce after becoming significantly oversold in the wake of last week’s hotter-than-expected U.S. October Consumer Price Index reading, which like Germany, underscored a striking rise in inflation.

In Washington politics, the U.S. House approved a roughly $ 2 trillion social-spending and climate-change bill backed by Biden, sending the measure to the Senate, where it is expected to face significant changes.

What analysts are saying
  • “Although all the headlines are in Europe at the moment, will the U.S. be more vulnerable than many European countries over the course of the full winter? Recent history suggests the U.S. has a higher bar for economic restrictions related to covid, but it also has a lower vaccination rate than European peers,” wrote Jim Reid, Deutsche Bank’s head of thematic research, in a note Friday.
  • The potential fallout from a winter wave of covid-19 cases “threatens to undermine the budding confidence of U.S. consumers attempting to reengage in the in-person economy,” BMO Capital Markets strategist Ian Lyngen and Ben Jeffery wrote in a note. “We’re anticipating the price action in the runup to Thanksgiving will be range-bound in nature and, if anything, have a slightly bullish skew.”