Bond Report: Bond yields rise after Russia resumes gas flows

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Bond yields rose on Thursday, as the resumption of gas flows to Europe through a crucial pipeline reduced concerns about a sharp economic slowdown on the continent.

What’s happening
  • The yield on the 2-year Treasury

    rose 1 basis point to 3.243%. Yields move in the opposite direction to prices.

  • The yield on the 10-year Treasury

    advanced 1 basis point to 3.048%.

  • The yield on the 30-year Treasury

    climbed 1 basis points to 3.175%.

The 10-year to 2-year spread of minus 19.2 basis points means the yield remains near its most inverted since the great financial crisis, potentially signaling a looming economic downturn.

What’s driving markets

Worries about a savage economic slowdown in Germany have receded after Russia resumed natural gas flows through the Nord Stream 1 pipeline on Thursday.

The International Monetary Fund had calculated that if the energy conduit was shut for a prolonged period it would hit industry and households, pushing the world’s fourth biggest economy into a sharp recession in 2023.

U.S. Treasury yields rose in line with German peers, with 10-year bunds

up 1.6 basis points to 1.275% as the market also waited to see by how much the European Central Bank would raise interest rates on Thursday.

Expectations for Federal Reserve policy were barely changed. Markets are pricing in a 64.4% probability that the Fed will raise interest rates by another 75 basis points to a range of 2.25% to 2.5% after its meeting on July 27th. The central bank is expected to take its borrowing costs to 3.6% by February 2023, according to Fed Funds futures.

U.S. economic data due on Thursday include jobless claims at 8:30 a.m. and leading indicators at 10 a.m., both Eastern.

Italian benchmark bond yields

jumped after Prime Minister Mario Draghi resigned in response to members of his governing coalition refusing to back him in a no-confidence vote.

The yield spread with Germany, a closely watched gauge of stress for Rome’s debt, jumped to 228 basis points, as doubts grew that Italy could fulfill conditions necessary to receive its €200 billion ($204 billion) share of the EU’s coronavirus recovery fund.

Investors are also awaiting the outcome of a European Central Bank meeting on Thursday that is expected to yield the first rate hike in more than a decade.

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