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Treasury Yields Climb as Consumer, Market Inflation Expectations Jump

Surging consumer confidence is being matched with forecasts for faster inflation, taking 10-year Treasury note yields to fresh 14-month highs.

U.S. Treasury bond yields moved higher Tuesday, taking benchmark 10-year notes past 1.77% and pushing the Nasdaq Composite index back below the 13,000 point mark, after a key reading of consumer confidence showed yet another jump in inflation expectations.

The Conference Board's March consumer confidence index surged to 109.7 points, the highest reading in a year, as Americans look into the final months of the coronavirus pandemic with renewed optimism. However, the near-term outlook for consumer inflation rates rose 2 basis points to 6.7 percent, the Conference Board noted, a move that falls largely in-line with interest rate market mechanisms for near-term price increase. 

The so-called breakeven rate between five-year Treasury bonds and five-year inflation protected securities, a key market gauge for consumer price increases, passed a 2008 high of 2.5% again Tuesday -- firmly ahead of the Fed's 2% inflation target -- while a similar reading for 10-year 'breakevens' hit the highest levels since 2013.

"Consumers' renewed optimism boosted their purchasing intentions for homes, autos and several big-ticket items," the Conference Board said. "However, concerns of inflation in the short-term rose, most likely due to rising prices at the pump, and may temper spending intentions in the months ahead."  

U.S. bond markets began to buckle last week amid a flurry of Treasury auctions that brought nearly $330 billion in new paper and tested the appetite of foreign buyers amid the longest sustained rise in yields -- which move in the opposite direction of prices -- in at least eight years.

A weaker-than-expected sale of $62 billion in 7-year notes bumped market yields higher on Thursday, alongside the lowest reading of weekly jobless claims in more than a year for the week ending on March 20, but Friday's market upheaval linked to block sales of U.S. and China-based tech stocks, which were ultimately traced to the Archegos Capital hedge fund, kept a lid on the increases.

This week's moves, however, have 10-year notes trading at 1.753%, after hitting a fresh 14-month high of 1.776% in overnight trading as inflation expectations gained steam on the back of stronger-than-expected economic data, the ongoing pledge from the Federal Reserve to keep base rates at all-time lows for at least the next two years and President Joe Biden's plans to boost infrastructure spending as part of a $3 trillion stimulus deal he'll unveil on Wednesday.

Tech stocks, the most sensitive to interest rate increases, took the brunt of the yield rise Tuesday with the Nasdaq Composite index falling 115 points to 12,928.3 points in late-morning trading, pegging the benchmark some 8% south of the all-time high it reached on February 12.