Treasury Yields Fall Sharply, 10-Year Rate Drops Toward 1.7% With Focus on Russia-Ukraine Conflict

Source: NYSE
  • The Russian invasion of Ukraine has entered its sixth day.
  • Meanwhile, Federal Reserve Chairman Jerome Powell is due to testify to Congress this week.
  • Investors will be watching the testimonies for any indication on whether the Russia-Ukraine conflict will affect the central bank's monetary policy plans.

U.S. Treasury yields fell sharply on Tuesday as investors remained focused on Russia's attack on Ukraine and its potential impact on Federal Reserve rate hikes.

The yield on the benchmark 10-year Treasury note fell 11 basis points to 1.726% in afternoon trading and fell as low as 1.682%. The yield on the 30-year Treasury bond dropped 7 basis points to 2.11. Yields move inversely to prices and 1 basis point is equal to 0.01%.

The Russian invasion of Ukraine has entered its sixth day. The attack has roiled global markets and seen investors look to safe haven investments like U.S. government bonds, pushing yields down.

"Until there is some sort of cease fire in Ukraine and the market no longer has to process additional sanctions and those impacts to the global economy, we will see geopolitical money flows continue to dominate the currency and bond markets, even with Fed Chair Powell's testimony tomorrow and Thursday," Tom Essaye of the Sevens Report said in a note to clients.

The Kremlin still wants to capture Kyiv, even as Russian forces continue running into stiff Ukrainian resistance, according to a Pentagon assessment shared with CNBC.

Satellite imagery has also emerged showing a large convoy of Russian military vehicles, some 40 miles (65km) long, advancing toward Kyiv. The satellite images were taken by Maxar Technologies on Monday and show a convoy of armored trucks traveling sometimes two or three vehicles abreast on the road.

The invasion of Ukraine, and the resulting sanctions on the Russian financial system, have caused volatility in the credit markets and led some traders to worry about potential ripple effects. The big moves in benchmark U.S. Treasurys were mirrored across the yield curve and in foreign bond markets.

John Luke Tyner, a portfolio analyst at Aptus Capital Advisors, said "there's smoke coming out of the engine here" but that were still some orderliness to the Treasury market despite the volatility.

"The curve is still able to keep the spread between 2s and 10s. That keeps the market from getting overly concerned," Tyner said.

Investors will be watching Powell's testimonies to Congress this week, for any indication on whether the Russia-Ukraine conflict will affect the central bank's plans for tightening monetary policy.

Geoffrey Yu, senior market strategist at BNY Mellon, told CNBC's "Squawk Box Europe" on Tuesday that markets will likely be focused on how sanctions against Russia could cause supply chain issues and drive up prices and, in turn, how policymakers will react.

"In the U.S., for example, we don't see this changing the Fed's path at all," Yu said.

However, the market volatility appeared to be leading some traders to dial back expectations, with the expectations for a 50-basis point hike in March going to zero, according to the CME FedWatch Tool.

In terms of data releases due out on Tuesday, Markit's final reading for its February manufacturing purchasing managers' index and ISM's February manufacturing PMI both came in close to expectations. Construction spending from January came in higher than expected. staff contributed to this market report.

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