US treasury yields marched higher overnight, and look set to extend rally today. Two-year yield hit its highest level in 16 years and could soon challenge the 5% handle, while 10-year yield remains above the 4% handle in the Asian session.
It’s believed that persistent worries about inflation remaining at a higher level for an extended period are driving the moves. As a result, Fed may respond by accelerating the tightening pace again. There is growing expectation in the market that Fed will implement a 50bps rate hike on March 22, with a 30% chance of this happening compared to 24% a week ago. Moreover, there is a 55% chance that rate will peak at 5.50-5.75% in July.
Furthermore, the recent surge in European yields is considered an even stronger reason for the rally in US yields. The recovery in EUR/USD reflects this sentiment. Germany 10-year yield hitting the highest level since 2011 on similar worries about inflation and ECB policies. A peak above 4% for ECB is more likely than ever before, while a rate cut this year is all but ruled out.
From a technical perspective, as long as the support level at 3.863 holds, the rally in US 10-year yield from 3.334 is expected to continue. The current development affirms that correction from 4.333 has completed with three waves down to 3.334. A retest of 4.333 is likely to occur next. While it is still early to predict, the TNX could eventually hit the 61.8% projection of 2.525 to 4.333 from 3.334 at 4.451 before topping out.