The benchmark U.S. 10-year Treasury yield rose to its highest level in almost two years on Monday, as investors increasingly expect the Federal Reserve will begin its tightening policy with an interest rate hike as soon as March.
Friday's payrolls report, which missed expectations on the headline number but showed sturdier underlying data that was viewed as unlikely to derail the likelihood of the central bank hiking rates and winding down its bond holdings sooner than many had initially thought.
Goldman Sachs now expects the Fed to raise interest rates four times this year, matching the view of analysts at J.P. Morgan and Deutsche Bank.
A tight labor market and rising inflation have fueled expectations the central bank will become more aggressive in raising rates and tapering its balance sheet. Investors will get a look at inflation date late this week in the form of consumer and producer prices indexes.
On Tuesday, investors will also hear from Federal Reserve Chair Jerome Powell when he testifies before a Senate Banking Committee hearing on his renomination.
"It is stalling out a bit, it is just a carryover from last week and we will either get reconfirmation of that when Powell speaks tomorrow or it could go the other way," said Jim Barnes, director of fixed income at Bryn Mawr Trust in Berwyn, Pennsylvania.
"We have had a pretty big run-up here over the past week and part of me thinks it is kind of overdone – we get it, it is a hawkish Fed at this point, they are projecting four rate hikes this year."
The yield on 10-year Treasury notes was up 0.9 basis points to 1.778% after climbing to 1.808%, its highest since Jan. 21, 2020.
The 10-year yield has risen for seven straight days, its longest streak of gains since an eight-day run in April 2018 and last week had its biggest weekly rise since September 2019.
Richmond Fed President Thomas Barkin said on Monday it is conceivable the central bank could hike in March, according to the Wall Street Journal. On Friday, San Francisco Federal Reserve Bank President Mary Daly said she could see the Fed shrinking its balance sheets after raising rates once or twice.
The yield on the 30-year Treasury bond was down 0.3 basis points to 2.113%.
The Treasury is expected to bring about more supply to the market this week, including $52 billion in 3-year notes , $36 billion in 10-year notes and $22 billion in 30-year bonds.
A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at 87.8 basis points.
The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 2.8 basis points at 0.898% after climbing to 0.91%, its highest since March 3, 2020.
The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.815%, after closing at 2.814% on Friday.
The 10-year TIPS breakeven rate was last at 2.511%, indicating the market sees inflation averaging 2.5% a year for the next decade.
The U.S. dollar 5-years forward inflation-linked swap , seen by some as a better gauge of inflation expectations due to possible distortions caused by the Fed's quantitative easing, was last at 2.420%.
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