Five-year Treasury yield climbs to highest since September 2008

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(Bloomberg) – U.S. Treasuries fell, dragging the yield on five-year bonds to the highest level since September 2008, amid speculation that lingering U.S. inflation will prompt the Federal Reserve to tighten its policy more aggressively.

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The yield jumped two basis points to 3.10%, extending its advance to nearly 184 basis points for this year. Investors await April data on consumer prices in the United States, due on Wednesday. Inflation accelerated to a 40-year high of 8.5% in March.

The milestone caps a remarkable sell-off in government bonds this year as central banks around the world cut pandemic-era stimulus and raise rates to tackle searing inflation.

“The market remains in poor shape,” said Christoph Rieger, head of fixed rate strategy at Commerzbank AG. “It is remarkable that the post-Fed selloff was actually driven by long-term real yields. This indicates that the market will revalue the terminal rate necessary to control inflation.

The pace of selling caught many traders off guard. Just over a week ago, a Bloomberg’s Market Live survey showed that 24% of readers believed 10-year yields would not rise above 3.15% this year. They reached 3.18% on Monday. The 10-year real yield jumped to 0.3%, a level last seen before the July 2019 pandemic.

Yields could also come under upward pressure across the curve this week, with the Treasury Department auctioning three-, 10- and 30-year debt worth a combined $103 billion. Still, lower U.S. inflation numbers coming in midweek offer at least a glimmer of hope that markets are stabilizing, Rieger added.

European government bonds were also under pressure after hitting new highs last week, when Germany’s 10-year yield climbed to touch 1% for the first time since 2015. The member of the Governing Council of European Central Bank Olli Rehn said policy markers should start raising rates in July to prevent inflation expectations from becoming unanchored.

Italian debt underperformed on Monday. The 10-year BTP yield rose 9 basis points to 3.22% before falling back. The spread over the equivalent German bond widened to as much as 207 basis points earlier after hitting a key level last week.

(Updates with additional context, quote.)

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