US 10-year bond yields slump back towards 1.40% after volatile week

After surging all week, US bond yields are seeing a sharp retracement on Friday, as bond-buying ramped up into the close of US trade. The selling is most pronounced at the long-end of the US treasury curve, which has bull flattened sharply; 30-year bonds now down nearly 19bps on the day to just above 2.10%. 10-year yields are down just over 10bps to bang on 1.40%. 2-year yields, which have remained comparatively well-anchored throughout the week and not at one point surpassed the upper end of the Federal fund rate target range (of 0.25%), are down 3bps to just under 0.14%. The 2-year/10-year government bond yield spread (a proxy for curve steepness) is back sharply from Thursday’s highs of above 140bps and is currently around 129 bps. Real US bond yields have plummeted by an even great amount on Friday; the US 10-year TIPS yield, which hit highs of -0.528% on Thursday, is back below -0.7% on Friday.

Market psychology (eagerness to buy the dip following Thursday sharp bond market sell-off) seems to be the predominant driver of price action, again, as fundamentals take the back seat. Indeed, dovish though they have remained, Fed officials have this week refrained from indicating any concern about the recent move higher in US government bond yields, so its not the Fed driving bond yield downside. Despite the drop on Friday, bond yields look set to finish the week a decent amount higher than where they started it; 10-year yields are up about 6bps from Monday’s opening levels around 1.36% and 10-year TIPS yields are up about 7bps from this week’s opening levels just under -0.8%.