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Bond Report: 10-year Treasury yield has biggest two-day drop in almost two years as investors monitor Russian invasion of Ukraine

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An aggressive rally in Treasurys continued unabated on Tuesday as investors continued to snap up U.S. government debt, sending the 10-year yield briefly below 1.7%, as Russia’s invasion of Ukraine entered its sixth day.

What are yields doing?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
1.724%

dropped to 1.715%, down firmly from 1.836% at 3 p.m. Eastern on Monday. It fell to as low as 1.68% earlier in the day.

The 2-year Treasury yield fell to 1.321% versus 1.426% on Monday afternoon. The 2-year rate dropped nearly 16 basis points on Monday for its largest one-day decline in two years.

The rate on the 30-year Treasury bond was 2.117%, down from 2.179% on Monday.

What’s driving the market?

Russia’s invasion of Ukraine entered its sixth day. The attack has roiled global financial markets, stoking demand for safe-haven assets and raising uncertainty about the global economic outlook.

Shelling by Russian forces again pounded civilian targets in Kharkiv, Ukraine’s second-largest city, on Tuesday as satellite images showed a 40-mile convoy of Russian tanks and other military vehicles advancing on Kyiv, the capital.

Read: Russia Targets Ukrainian Civilian Areas in Tactical Shift

The U.S. and other Western nations hit Russia with additional sanctions over the weekend and Monday, effectively removing more Russian banks from the SWIFT interbank messaging system and taking aim at the country’s central bank in a move that has seen hampering its ability to access its large stockpile of currency reserves. The ruble
USDRUB,
+2.17%

collapsed Monday, hitting an all-time low in a volatile trading session.

Read: Sanctions take aim at Russia’s economy: Here’s who is most exposed

Investors are weighing the implications of the invasion on the outlook for inflation and global growth, as well as how central banks, particularly the Federal Reserve, will respond. Commodity prices have surged in the wake of the invasion and sanctions, with Brent crude
BRN00,
+0.74%
,
the global oil benchmark, trading above $106 a barrel as of Tuesday afternoon.

But uncertainty about the economic outlook has prompted traders to less aggressively price in big rate increases by the Federal Reserve and other major central banks. Rate futures were pricing in zero chance the Fed would hike interest rates by a half-point this month. That’s down from 41% a week ago, according to probabilities derived in the CME FedWatch tool. The market is now pricing in an almost 100% chance of a quarter-point increase.

In data releases, the final reading of IHS Markit’s manufacturing purchasing managers index came in at 57.3 in February versus an initial 57.5 reading. The Institute for Supply Management’s manufacturing index rose to 58.6% in February from 57.6% previously and the prices paid index slipped to 75.6% from 76.1%.

President Joe Biden will deliver his State of the Union address on Tuesday night.

See: Russia-Ukraine war, surging inflation, rising rates: Here’s how some see the state of stock market as Biden readies State of the Union.

Employment data will also roll in this week, culminating in the Friday release of the official February jobs report. Federal Reserve Chairman Jerome Powell is slated to testify before a House panel on Wednesday and a Senate committee on Thursday.

What are analysts saying?

“The dramatic adjustment to interest rate expectations continues. The market has now nearly fully rejected a 50 [basis point] hike” by the Fed, the Bank of England and the Bank of Canada, said Marc Chandler, chief market strategist at Bannockburn Global Forex, in a note.

“While the war in Ukraine has finally triggered a big drop in developed market sovereign bond yields today, we think the likely inflationary impact of the war limits the scope for a sustained rally in DM bonds, especially outside the euro-zone,” Capital Economics markets economist Franziska Palmas wrote in a note.

Apple halts product sales in Russia

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