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Bond Report: Treasury yields climb further, sending the 5-year maturity to 4%

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Treasury yields continued to climb on Friday amid expectations that markets are in for more U.S. interest rate increases, following the Federal Reserve’s tightening move earlier this week.

What’s happening

The yield on the 2-year Treasury
TMUBMUSD02Y,
4.224%

rose 6 basis points to 4.195%, marking the highest level since August 2007, according to Dow Jones Market Data. That’s a day after the yield rose 13.1 basis points to 4.124% to the highest since Oct. 16, 2007, based on 3 p.m. Eastern time levels.

The yield on the 10-year Treasury 
TMUBMUSD10Y,
3.772%

advanced 5 basis points to 3.768%, inching further into record territory. The yield surged 19.4 points to 3.705% on Thursday, the highest level since Feb. 10, 2011.

The yield on the 30-year Treasury
TMUBMUSD30Y,
3.671%

climbed 4 basis points to 3.689%, putting it at levels not seen since late 2013. The yield rose 11.8 basis points to 3.636% on Thursday, the highest since April 2, 2014.

What’s driving markets?

Investors continued to flee government debt, raising yields and adding to the attraction of the U.S. dollar after this week’s interest rate increase by the Federal Reserve this week and hawkish comments by Fed chair Powell. The ICE Dollar Index
DXY,
+0.90%

shot up to a level not seen since 2002 on Friday.

Markets remain concerned that the U.S. economy may slip into recession as the Fed could go too far in its monetary tightening cycle. Dow index futures
YM00,
-1.19%

pointed to a more than 300-point drop for the Dow industrials when the stock market opens this morning.

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“Are markets concerned the Fed cycle will extend for longer, that more Treasury supply will be coming from the Fed’s QT picking up pace or from the Bank of Japan selling Treasurys to fund intervention, that the U.S. growth outlook is actually more positive than previously thought or all of the above?” said the Saxo Bank team in a note to clients.

“Whatever the cause, US long Treasury yields are likely to prove a key driver across markets as long as they continue to rise to new cycle highs,” said the strategists.

Read: Investors fear ‘ship has sailed’ on soft landing with risk of fed funds headed for 5% in 2023

The Federal Reserve hike was followed by increases across global central banks this week, including Switzerland and Norway, and the U.K.

U.K. yields
TMBMKGB-10Y,
3.796%

soared on Friday and the British pound
GBPUSD,
-1.89%

slumped to a level not seen since the mid-1980s as the U.K. government cut a host of taxes and said the cost of capping energy bills, saying it will cost £60 billion ($66 billion) over the next six months.

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