Bond Report: 10- and 30-year Treasury yields see biggest two-day drops since March as buyers return to bonds

What yields are doing

The yield on the 10-year Treasury note
TMUBMUSD10Y,
2.998%
declined 9 basis points to 2.99% from 3.08% at 3 p.m. Eastern on Monday. The yield is down 13.4 basis points over the last two trading days, the largest two-day decline since March 4, based on 3 p.m. yields, according to Dow Jones Market Data. Yields and debt prices move opposite each other.

The 2-year Treasury note yield
TMUBMUSD02Y,
2.610%
rose less than 1 basis point to 2.623% from 2.618% Monday afternoon.

The yield on the 30-year Treasury bond
TMUBMUSD30Y,
3.133%
declined 7.9 basis points to 3.127% from 3.206% late Monday. The yield is down 9.3 basis points over the last two trading days, the largest two-day decline since March 30.

What’s driving the market

Treasury yields retreated on Tuesday as worries over the outlook for growth and the potential for stagflation continued to weigh on markets.

Financial markets have turned volatile in the past week since the Fed’s May 4 decision to increase the fed-funds rate by a half-point and to announce the unwinding of its balance sheet on June 1. At issue for investors is a combination of concerns over higher interest rates, stagnating growth and persistent inflation.

The next major inflation reading comes on Wednesday, with the release of the April consumer-price index.

Tuesday brought a number of appearances by Federal Reserve officials. New York Fed President John Williams said the central bank can bring inflation down while maintaining a strong economy this year. Meanwhile, his colleague, Richmond Fed President Tom Barkin, said the Fed doesn’t need to engineer a “Volcker-style recession” to get inflation under control.

Fed Gov. Christopher Waller said now is the time to hike interest rates because the economy “can take it.” And Cleveland Fed President Loretta Mester said policy makers aren’t ruling out 75 basis point moves forever.

Treasury’s auction of $45 billion of 3-year notes
TMUBMUSD03Y,
2.820%
on Tuesday was met with “good” demand, said FHN Financial’s Jim Vogel.

What strategists say

“We expect the U.S. 10-year to stabilize in the 3% area as global financial conditions have tightened dramatically in response to the Fed’s erratic shift to tight policy,” said Jay Hatfield, chief investment officer at Infrastructure Capital Management in New York.

“If we are correct about the bond market stabilizing, U.S. stocks should be able to find a bottom in the S&P 4,000 area as Treasury rates are a key driver of all public stock valuations, not just technology stocks,” Hatfield wrote in an email. “Our valuation model indicates that fair value for the S&P is 4,100 with the 10-year at 3% but only 3,600 if the 10 year rate rises to 4%.”