By Sebastian Pellejero and Sam Goldfarb 

U.S. government bonds showed signs of stabilizing Friday, pushing yields lower a day after a chaotic session had sent them soaring.

The yield on the benchmark 10-year Treasury note settled at 1.459%, according to Tradeweb, down from 1.513% at Thursday's close. The 10-year yield rose more than 0.3% in February for the largest one-month rise since November 2016.

Yields, which rise when bond prices fall, climbed sharply on Thursday as a weekslong selloff intensified -- fueled by bets that the Federal Reserve will start raising interest rates earlier than previously expected in response to what investors widely expect to be a burst of economic growth and inflation later this year.

The 10-year yield logged its largest one-day gain since Nov. 9 during Thursday's session to finish at its highest closing level in a year. The five-year yield, which is more sensitive to the near-term outlook for interest rates, experienced its largest one-day gain in more than 10 years.

Higher yields, though, helped investors regain their appetite for Treasurys on Friday. Demand was also boosted by it being the last trading session of the month, when many fund managers buy Treasurys to match the adjustments in their benchmark bond indexes.

While many investors expected the 10-year yield to move higher in 2021, the jump to 1.5% from around 1% in a matter of weeks is raising some concerns. While Fed officials have said that the yield's climb toward pre-pandemic levels marks a return to normalcy, some investors worry their lack of concern could spur more selling.

"Thursday's rate move shows some signs of the dysfunction that prompted Fed action in March [2020]," wrote Bank of America analysts in a Friday note. "However, the Fed will be challenged to push back aggressively on the move, since, so far, they have described it as reflecting 'healthy' factors."

After falling overnight, yields did tick higher early Friday after the Commerce Department released new data showing U.S. household income jumped 10% in January and consumer spending rose 2.4%, suggesting the economy is primed for a burst in growth this year.

Investors tend to sell Treasurys when they expect faster growth and inflation, which lowers the value of bonds' fixed payments and can prompt the Fed to raise interest rates. Their optimism has been lifted recently by improving economic data, the promise of more government spending and the expanding distribution of coronavirus vaccines.

Friday's yield declines were led by longer-term bonds, with the yield on the 30-year bond dropping to 2.187% from 2.303% Thursday.

Despite the overall selling pressure, the gap between shorter-term and longer-term yields has been shrinking in recent sessions after expanding steadily earlier in the year. Along with noting a shift in expectations about the timing of Fed rate increases, some analysts said the gap between short and long-term yields had simply become too large and was due for a correction.

The gap, or spread, between yields on 5-year and 30-year Treasurys finished Friday at 1.412 percentage points, down from 1.504 Thursday and the tightest spread in nearly a month.

Write to Sebastian Pellejero at sebastian.pellejero@wsj.com and Sam Goldfarb at sam.goldfarb@wsj.com

 

(END) Dow Jones Newswires

February 26, 2021 16:49 ET (21:49 GMT)

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