(Bloomberg) -- A gauge of U.S. Treasuries is hurtling toward the biggest quarterly loss on record, as traders bet on hefty Federal Reserve rate increases and the possibility of a cease-fire between Russia and Ukraine.
The ICE BofA US Treasury Index has fallen more than 6% so far this year, with benchmark 10-year yields climbing Tuesday toward the highest in almost three years. Yields reached the highest levels of the day after Russia, following a round of talks with Ukraine, said it would sharply cut military operations near Kyiv and Chernihiv. The potential for a cease-fire eroded demand for haven assets also including the dollar and gold, and oil fell sharply.
Traders are wagering on at least two half-point rate increases from the U.S. central bank by July, and see an 80% chance of such an increase when policy makers next meet in May. That’s hurt short-dated bonds the most, driving an inversion of a key part of the yield curve.
Treasury Yields Show Fed’s Final Rate a Key to Depth of Rout
Five-year yields rose above 30-year yields on Monday -- for the first time since 2006 -- signaling to some investors that the wave of policy tightening could end up causing a recession. That view has yet to be reflected in financial conditions, with a Bloomberg measure approaching accommodative levels for the first time in a month.
“Such conditions give room for the Federal Reserve to be more aggressive in tightening the economy,” Althea Spinozzi, a fixed-income strategist at Saxo Bank A/S, wrote in a note.
European government bonds led Treasuries lower, with German debt among the biggest decliners. The yield on two-year German notes rose above 0% for the first time since 2014, reaching 0.039%.
(Updates yield levels, Ukraine developments.)
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