Bond Report: 2- and 10-year Treasury yields flash warning as reaction to Ukraine crisis deepens

What yields are doing

The 10-year Treasury note
TMUBMUSD10Y,
1.780%
yields 1.748% after hitting a Monday low at 1.675%, compared with a 1.722% on Friday at 3 p.m. Eastern Time. Yields for government debt move in the opposite direction to prices.

The 2-year Treasury note
TMUBMUSD02Y,
1.540%
rate stands at 1.546%, up 5.6 basis points from 1.49% at the end of last week.

The spread between the 2-year and 10-year Treasury stands 20.2 basis points.

The 30-year Treasury bond
TMUBMUSD30Y,
2.192%
yields 2.149%, little changed versus 2.148% on Friday afternoon.

What’s driving the market?

Yields for government debt rose on Monday as investors weighed the conflict in Eastern Europe and the implications on the red-hot energy sector.

President Joe Biden hasn’t made a decision about banning Russian oil imports into the U.S., White House press secretary Jen Psaki said on Monday, speaking at a regular briefing. Psaki said discussions about a potential ban are happening within the U.S. government as well as with other nations.

Those comments come amid reports earlier that indicated that the U.S. was considering sanctioning Russian oil imports as the Eastern European military conflict, between Kyiv and Moscow intensifies.

Over the weekend, U.S. Secretary of State Antony Blinken said during a round of Sunday talk shows that the White House is considering a coordinated ban of Russian oil and natural gas imports, which could push oil values for energy assets higher.

However, Germany, dependent on oil out of Moscow, appears reluctant to implement an oil embargo just yet, according to reports.

Richer oil prices holds implications for U.S. and global inflation in the near term and can compound fears of surging pricing pressures for goods and services.

See: What soaring crude prices mean for the U.S. stock market, amid talk of Russian oil sanctions

Although worries about the conflict in Europe has drawn so-called flight-to-safety bids among buyers aiming to benefit from the steady coupon payments of government debt in uncertain times, inflation has the power to erode a bond’s fixed value.

On top of that, the Federal Reserve has said it is eager to lift benchmark Fed funds rates, which stand at a range between 0% and 0.25%, by a quarter of a percentage point at its coming policy gathering next week.

Some fear that the combination of war abroad, already elevated inflation and rising rates could create a recession in the U.S., a notion that appears to be getting reflected in the narrowing spread, known as the yield curve, between 2-year Treasury notes and benchmark 10-year debt.

An inversion of the yield curve, when the shorter maturity yields more than its longer-term counterpart, has been an accurate predictor of inflations over the past several decades.

What strategists are saying

“The yield curve flattening portends much more ominous growth assumptions,” wrote analyst at Jefferies, led by Sean Darby, global equity strategist, in a Monday note.

“The playbook that the central banks had hoped for a smooth tightening of inflation
expectations has been rudely interrupted by the Russian invasion of Ukraine. Not
only have energy prices soared but so too have food prices,” Darby said.