Quantitative Easing

Treasury yields fall as Russia invades Ukraine

The U.S. Treasury building is seen in Washington, September 29, 2008. REUTERS/Jim Bourg/File Photo

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  • Treasury yields trim losses after sharp initial drop
  • Demand for safe havens is stronger in Europe than in the United States
  • Treasury sells $50 billion in 7-year notes

NEW YORK, Feb 24 (Reuters) – Investors piled into U.S. government debt on Thursday, pushing Treasury yields lower after Russia invaded Ukraine, but early declines then narrowed as as investors weighed the impact of the assault on the economy and capital markets.

US President Joe Biden has hit Russia with a wave of sanctions after Ukraine reported troops crossing its borders and landing on its shores in the biggest attack by one country on another in Europe since the Second World War. Read more

Global stock markets initially fell sharply and investors fled to safe havens such as US Treasuries and gold. But Wall Street rallied after Biden’s speech and the decline in Treasury yields narrowed, with the 30-year note turning positive.

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“It is too early to assess or read too much into the market reaction,” said Subadra Rajappa, head of US rates strategy at Societe Generale.

Markets will be volatile in the days and weeks ahead “until we have more clarity on what is happening in the US, internationally as well as conditions on the ground,” Rajappa said. .

The yield on 10-year Treasury bills fell 1 basis point to 1.967%. The previous U.S. benchmark slipped to 1.846%, on track for its biggest daily decline since late November.

The US dollar strengthened, up nearly 1% against major currencies, and oil, rose more than 7% before paring its gains with risky assets.

If the Russian incursion is limited to Ukraine and does not pass through any NATO-linked country, tensions are likely to change, especially for US assets, said Kevin Flanagan, head of fixed income strategy at WisdomTree Investments.

“In the short term, uncertainty will reign. You will see volatility in the market which will translate into a back and forth to quality and safe haven trading,” Flanagan said.

While the invasion of Ukraine is far more different in scale than Russia’s entry into Crimea in 2014, it’s even more of a Eurocentric issue at the moment, Flanagan said.

“It won’t affect American consumer and business behavior unless things turn into another phase,” he said.

A closely watched part of the yield curve measuring the spread between two- and ten-year Treasury yields, seen as an indicator of economic expectations, was at 39.7 basis points, up slightly from previous days.

History has shown over the past 50 years that geopolitical events rarely have a lasting, long-term impact on capital markets, said Stan Shipley, strategist at Evercore ISI.

“They’re moving certain sectors, whether it’s financials, banking, or energy prices,” Shipley said. “But the trends we were seeing will likely continue after a short break.”

The U.S. Federal Reserve, which will hold its next policy meeting on March 15-16, has in the past favored delaying major policy decisions until uncertainty over geopolitical risks has subsided, Goldman Sachs said.

But the current situation is different as inflation risk has created a more pressing reason to tighten, although uncertainty has reduced the odds of a 50 basis point interest rate hike in March, Goldman said. . But Goldman said he sees rates rising steadily by 25 basis points in upcoming meetings.

Money markets have priced a 16.5% chance of a 50 basis point rate hike in March, less than half the odds of such a hike on Wednesday.

Ukraine’s invasion complicates the Fed’s policy outlook, as energy and some grain prices are likely to rise further if the attack deepens, said John Vail, chief global strategist at Nikko Asset Management. .

“The silver lining is that the decline in risky markets has helped keep bond yields from reaching new yearly highs,” he said.

Across the US Treasuries yields were significantly lower, but later pared the declines. The two-year note fell 3.2 basis points to 1.568%.

The Treasury’s sale of $50 billion in seven-year notes was strong, yielding 1.905%. The yield then rose to 1.946%.

In Europe, Germany’s 10-year rate, the benchmark for the euro zone, gradually pared its losses towards the end of the session.

As investors rushed to hedge against inflation risks, yields on inflation-linked bonds fell.

The yield on 10-year Treasury inflation-protected securities (TIPS) was last at 2.574%, indicating that the market expects inflation to average around 2.6% per year over the next decade.

US Treasury yields fall as Russia launches invasion of Ukraine

The breakeven rate on five-year TIPS was last at 3.028%.

The five-year U.S. dollar inflation-linked swap, seen by some as a better gauge of inflation expectations due to possible distortions caused by Fed quantitative easing, last stood at 2.358%.

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Reporting by Herbert Lash; additional reporting by Dhara Ranasinghe, Sujata Rao and Yoruk Bahceli in London; Editing by Marguerita Choy and Leslie Adler

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