U.S. Treasuries resume selloff on new signs of inflation

U.S. Treasuries resumed a selloff and bond yields rose on Thursday on fresh data that added to fears that rapidly rising inflation may spur the Federal Reserve to tighten policy too much and cause an economic downturn.

The number of Americans filing new claims for jobless benefits dropped to a 52-1/2-year low last week and unemployment rolls continued to shrink, pointing to a tight labor market that will keep boosting wage inflation.

Comments seen as decidedly hawkish from Federal Reserve chief Jerome Powell on Monday triggered a bond market selloff that has pushed yields this week to multiple-year highs from the low-end to the longer-end of yield curve.

Neel Kashkari, president of the Minneapolis Fed, told a business conference on Thursday he has penciled in seven quarter-point interest rate hikes this year to help rein in high inflation, but warned against going too far.

“There’s a danger to overdoing it,” Kashkari said, if pandemic-snarled supply chains get fixed faster than expected or workers return to the labor force in bigger numbers.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes was at 20.6 basis points, a level close to an inversion that often predicts a recession in the near future.

The bond market is saying that past the short term inflation will begin to abate, said Nancy Davis, managing partner and chief investment officer at Quadratic Capital Management LLC.

“The bond market is definitely in the transitory camp,” Davis said. “It’s a bizarre time where you have the Fed tightening, the bond market saying inflation is not going to pick up and then equities are just carrying on.”

The Treasury is due to auction $14 billion of 10-year inflation-protected TIPS securities