By Dhara Ranasinghe
LONDON (Reuters) – Investors piled into U.S. sovereign debt on Thursday, pushing Treasury yields sharply lower after Russian forces launched an invasion of Ukraine.
Russian forces fired missiles at several cities in Ukraine and landed troops on its coast, officials and media said, after President Vladimir Putin authorised what he called a special military operation in the east.
The news triggered a slide in world stock markets, pushing investors into safe havens such as U.S. Treasuries and gold.
In London trade, the yield on the benchmark 10-year Treasury yield was down roughly 9 basis points on the day at 1.90%. It was on track for its biggest daily drop in almost two weeks.
“There’s clearly no risk appetite this morning and lots of uncertainty,” said Chris Scicluna, head of economic research at Daiwa Capital Markets in London.
Across the U.S. Treasury curve, yields were sharply lower on the day, echoing moves in European sovereign debt markets.
Trade in money market futures meanwhile suggested that investors continued to take off their most aggressive bets for interest rate hikes from the Federal Reserve.
Markets still price in a 25 basis point rate hike at the Fed’s March meeting but bets on a larger 50 bps move have ebbed in the face of the escalating tensions between Russia and the West over Ukraine.
Justin Onuekwusi, a portfolio manager at LGIM, said that expectations for the number of rate hikes this year were being lowered despite the impact on inflation from rising energy prices, because of a perception that it could be the wrong time to start taking liquidity out of markets.
“Central banks may have to look through an inflation spike though that means ultimately rate hikes could become substantially bigger,” he said.
Commerzbank rates strategist Rainer Guntermann noted that a scaling back in rate hike expectations was also reflected in the move lower across the Treasury curve.
“You’ve seen the Treasury curve moving lower basically parallel from two year to 10-year overnight, not just the usual liquid part like 10s or so but also 2-years, which is probably a reflection of less rate hikes,” he added.
Oil prices surged, with Brent breaching $100 a barrel for the first time since 2014, as Russia’s attack on Ukraine exacerbated concerns about disruptions to global energy supplies.[O/R]
As investors rushed to protect against inflation risks, yields on inflation linked bonds fell. The yields on the 10-year Treasury Inflation-Protected Securities (TIPS) fell to as low as -0.702% — its lowest level in just over three weeks.
(Reporting by Dhara Ranasinghe; additional reporting by Sujata Rao and Yoruk Bahceli. Editing by Jane Merriman)
