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Bond Report: 2-year Treasury rate marks largest daily drop in two years as Putin puts nuclear forces on alert amid Russia sanctions

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Treasury yields fell Monday as investors showed renewed appetite for havens after the U.S. and its allies added new sanctions against Russia over the weekend as a result of its invasion of Ukraine.

Adding to jitters, Russian President Vladimir Putin put the country’s nuclear forces on high alert Sunday in response to the global backlash against the invasion.

What are yields doing?

The 2-year Treasury note yield
TMUBMUSD02Y,
1.452%

was at 1.44% versus 1.584% on Friday afternoon. Yields and debt prices move opposite each other.

The yield on the 10-year Treasury note BX:TMUBMUSD10Y fell to 1.87%, down from 1.984% at 3 p.m. Eastern on Friday.

The 30-year Treasury bond yield
TMUBMUSD30Y,
2.168%

declined to 2.208% from 2.294% late Friday.

What’s driving the market?

Investors jumped back into traditional havens, including Treasurys, on Monday as U.S. stock benchmarks
SPX,
-0.24%

DJIA,
-0.49%

opened sharply lower and Russian assets were slammed. The ruble plunged to an all-time low and the country’s central bank doubled its official interest rate to 20%.

Read more: Russian central bank lifts interest rates to 20% as ruble plunges over Western sanctions

On Saturday, the U.S., EU, U.K. and Canada pledged to remove “selected” Russian banks from the SWIFT interbank messaging network, increasing sanctions on Moscow. European countries, which had previously appeared reluctant to removing Russian banks from SWIFT, moved in favor of more aggressive actions after an initial round of sanctions appeared to have little effect on Putin, The Wall Street Journal reported. The country’s central bank was also targeted, with the U.S. Treasury on Monday prohibiting any transactions with the institution, as well as Russia’s national wealth fund and the Russian Ministry of Finance. 

Russian forces continued to press into Ukraine but news reports said they continued to struggle to make headway, with Ukrainian forces continuing to fend off attacks on the capital, Kyiv. A delegation led by Ukraine’s defense minister was set to talk with Russian officials at Ukraine’s border with Belarus, though prospects for a cease-fire appeared uncertain, according to the Journal.

Meanwhile, investors were wrestling with the implications of the invasion on the outlook for inflation and how central banks, particularly the Federal Reserve, will respond. Commodity prices have surged in the wake of the invasion, with crude oil
CL.1,
+4.72%

BRN00,
+0.13%

trading near $100 a barrel early Monday, while a jump in wheat
W00,
+8.72%

and corn
C00,
+5.34%

futures stoked food-inflation worries.

In data releases, the U.S. trade deficit jumped 7.1% in January to $107.6 billion and hit a new all-time high for the second month in a row. Meanwhile, a February reading of a Chicago-area purchasing managers index dropped to 56.3 from 65.2. Atlanta Federal Reserve Bank President Raphael Bostic was scheduled to speak at 10:30 a.m.

Fed Chairman Jerome Powell will testify before a House committee on Wednesday, while employment data will roll in this week, culminating with the official February jobs report on Friday.

What are analysts saying?

“President Putin raising the alert on its nuclear deterrent only illustrated a further escalation in the conflict. At the same time, markets are pondering the potential consequences for the economy and financial system after western allies decided to decouple some Russian banks from the Swift payment system and took restrictive measures limiting the Russian central bank to use of its international reserves,” wrote analysts at KBC Bank, in a note.

“At the end of last week, it looked that the key [economic] data to be published in the U.S. (payrolls) and in Europe (inflation) this week could regain some market attention ahead of the upcoming March Fed and ECB meetings. However, short-term trading in U.S. and even more on European markets will be dominated by a new risk-off wave,” they said.

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