The 10-year U.S. Treasury yield continued its slide on Wednesday, dropping to the lowest level since February despite concerns about rising inflation and a gradual removal of Federal Reserve stimulus.
The drop in yields continued to mystify investors who mostly expected yields to climb higher this year as the economy recovered from the global pandemic. The decline came ahead of the release of the Federal Reserve's minutes from its latest meeting.
The yield on the benchmark 10-year Treasury note fell 5 basis points to 1.318% at 4:00 p.m. ET, its lowest since late February. The yield on the 30-year Treasury bond dipped 6 basis points to 1.93%. Yields move inversely to prices and 1 basis point equals 0.01%. The shorter end of the curve was largely unchanged, causing a flattening.
The 10-year yield rose as high as 1.78% in March as investors bet on an economic comeback and faster inflation. Since then, yields have rolled over and prices increased with explanations for the move varying from foreign buying interest to fears of peak economic growth to increased concerns about Covid-19 variants.
Some traders also believe the move to take away stimulus by the Fed could raise short-term rates, while causing longer-term rates to fall on fears of an economic slowdown.
There are "some troubling signs in market breadth, which would reinforce our concerns about the market being in a 'wedge,' threatened by earnings weakness on one extreme and a potential reversal in real rates (which would compress valuations) on the other," Michael Darda of MKM Partners said in a note Wednesday.
Darda added that with the 10-year yield briefly falling below 1.30% he expects a growth slowdown next year, although high yield spreads have moved very little and the ratio of copper to gold has flattened, though it hasn't collapsed.
"If real rates do rise by 100 bps or so against a still credible Fed average inflation targeting regime, we likely will have a valuation compression in highly valued sectors," he said. "If instead risk spreads blow out and commodity prices crash, earnings expectations are likely not going to hold up next year."
The Fed published the minutes from its June 15-16 meeting Wednesday, in which they discussed reducing asset purchases but also expressed the need for patience. Slowing down the bond buying would be the Fed's first major retreat from the easy policies it put in place when the economy shut down last year. The end of the Fed's $120 billion a month in Treasury and mortgage purchases would also signal that the central bank's next move could be to raise interest rates.
The meeting summary also reiterated the Fed's view that inflation has been rising faster than they expected but that they see that trend as transitory.
Job openings in May climbed to a 9.2 million, according to the JOLTS report released Wednesday.
An auction was held Wednesday for $35 billion of 119-day bills.
— CNBC's Michael Bloom contributed to this market report.