Longer-dated U.S. Treasury yields on Thursday dropped to around five-month lows as stock markets tumbled, raising fears that the rally in government debt is signaling a growing worry about the economic rebound from COVID, which most recently saw the S&P 500 and Nasdaq Composite end at all-time highs.

On Wednesday, minutes of the Federal Reserve’s June policy meeting confirmed that policy makers are intensely discussing the timing and conditions necessary to consider a slowdown of monthly bond purchases that have helped buoy the market amid the pandemic.

How Treasurys are performing

The 10-year Treasury note

yields 1.275%, compared with 1.321% at 3 p.m. Eastern Time on Wednesday.

The 30-year Treasury bond rate

was at 1.892%, versus 1.943% a day ago.

The 2-year Treasury note

was at 0.216%, little changed.

Fixed-income drivers

The reflation trade is dead, long live the reflation trade. An an atmosphere of “risk off” washed over the market Thursday and bonds are leading the charge.

A day after a duo of record closes for U.S. stock market indexes, government debt yields are digging deeper into the abyss, with some strategists pointing to 1.20% as possible signal from the benchmark 10-year Treasury for the broader market that fixed-income investors see problems brewing in the economy or the market, or both.

The current decline in yields has been playing out since the conclusion of the Federal Reserve’s two-day meeting on June 16.

On Wednesday, minutes from that mid-June meeting emphasized that the U.S. central bank is starting to contemplate rolling back some of its accommodative measures, including its $120 billion a month asset-purchase program, which has helped to support financial markets since the height of the pandemic disruptions last year.

The minutes implied that the Fed may need to taper its asset purchases sooner than later, paving the way for interest rate increases, but the account of the central bank’s talks didn’t suggest that policy makers were unified.

The minutes did show that officials still expect recent inflation surges to be short-lived, driven by bottlenecks and a surge in post-pandemic demand.  

Looking ahead, investors will parse weekly data on U.S. jobless benefit claims at 8:30 a.m. Eastern Time, with economists expecting claims for unemployment insurance to have fallen to 350,000, adding to evidence of a recovery in the labor market.

What strategists are saying

“The unravelling of the inflation/reflation trade has accelerated over the past week. US 10year bond yields continue to decline and have now broken a crucial technical level. This could see the rally accelerate sharply, and with it, the continued unravelling of cyclicals and commodities,” wrote Société Générale’s Albert Edwards, in a research note published Thursday.

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