Mon, January 30, 2023

Treasury Yields Are Falling

TheUS Treasury Market Suffering Amplifys Liquidity Concerns

US Treasury yields fell on Tuesday as investors focused on developments in China and Federal Reserve officials’ comments on monetary policy plans.

More than three basis points recently reduced the benchmark 10-year Treasury yield to 3.666%. After falling by more than three basis points, the two-year Treasury yield was last trading at around 4.4381%.

Yields and prices are inversely related, with one basis point equal to 0.01%.

Investors have been paying close attention to COVID developments in China as concerns about the country’s economic reopening have grown in recent weeks. Rising cases have resulted in tight restrictions, which have sparked protests over the weekend.

Traders were also digesting comments from Fed speakers about future interest rate policy as recession fears remained.

Inversion of the yield curve is commonly thought to herald a recession, as investors shift money to longer-term bonds due to pessimism about the economy. These concerns grow as policymakers pledge additional monetary tightening to contain rising consumer prices.

European Central Bank President Christine Lagarde signaled that more rate hikes are on the way, saying she would be surprised if euro-zone inflation had peaked. Four Federal Reserve officials commented on the same day, indicating that interest rates may need to rise.

According to Deutsche Bank AG strategists led by chief group economist David Folkerts-Landau in London, Germany may already be in recession. At the same time, the US should enter one by the middle of next year.

China’s COVID Protests

Over the weekend, protests against China’s lengthy and restrictive COVID regulations swept the country. Protests against Chinese President Xi Jinping and his expensive zero-COVID policy are rare instances of widespread civil disobedience.

While the protests present Xi with an unprecedented challenge, they also have economic and market ramifications. On Monday, oil fell to 2022 lows.

People under lockdown say they have difficulty finding food and other necessities. Economic growth has slowed, and unemployment has risen.

In addition, the policy has resulted in significant global production constraints supporting inflation. The Federal Reserve Bank of New York’s Global Supply Chain Pressure Index indicates that global supply chain pressures moderately increased in October after easing for five straight months, primarily due to longer Asian delivery times. However, commodities fell on Monday due to concerns about China. Investors are concerned that rising COVID cases and protests in China will reduce demand from one of the world’s largest oil consumers.

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