(Bloomberg) – Treasuries tumbled as renewed inflation fears partially unwound a rally that put stocks on course for their first monthly gain since November.
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US sovereign yields climbed across the curve as oil hit a two-month high and European inflation data for May beat economists’ forecasts. Warmongering comments from Federal Reserve Governor Christopher Waller helped sell bonds.
Yields on three-, five-, seven- and 10-year Treasury bills all jumped at least 10 basis points after falling for most of the past three weeks. Tuesday’s decision was exacerbated as U.S. government debt caught up with other financial markets after being closed Monday for U.S. Memorial Day.
“We have yet to fully recognize that inflation has become self-perpetuating, and getting it under control will be more difficult and more painful than the central bank hopes,” wrote Sonal Desai, chief investment officer for income securities. fixed at Franklin Templeton. Remark. “The Fed tightening cycle will be longer, and policy rates and bond yields will need to go higher than markets currently expect.”
Despite Tuesday’s sell-off, the US 10-year yield is still about 40 basis points lower than its recent high reached earlier this month as investors begin to see value in fixed-income assets again. Investors are caught between high inflation and a tightening of monetary policy, which aims to slow it down but is also increasingly seen as a threat to the economy.
Bunds and other European bonds fell on Monday after German inflation hit a new all-time high, adding urgency to the European Central Bank’s exit from crisis stimulus. Inflation in Spain also accelerated unexpectedly.
At the same time, Fed Governor Waller argued for more rate hikes until price pressures ease.
“I support policy tightening by another 50 basis points for several meetings,” he said in Frankfurt. “In particular, I will not take the 50 basis point hikes off the table until I see inflation moving closer to our 2% target.”
Read more: Bonds rally everywhere in May with bulls saying the sell-off is over
The fall in Treasuries also appears to be due to portfolio rebalancing at the end of the month. JPMorgan Chase & Co. estimates that these flows could cause equities to outperform by 1% to 3% in the last week of May, as pension funds shift allocations to equities rather than bonds.
Treasuries returned 0.8% in May, which would be the first monthly gain since November. The S&P 500 index of US stocks rose 0.6%.
“I am not completely convinced” that 10-year Treasury yields have seen the cycle high, Kit Juckes, strategist at Societe Generale SA in London, wrote in a client note. “There’s a good chance Treasuries will turn the screw at least once more, likely this summer as rates rise another 100 basis points.”
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