How global inflation concern impacts treasury yields

Central banks around the world are facing a challenging task as global inflation continues to soar, leading to an uptrend in treasury yields. The recent inflation data from countries like England, where the inflation rate came in at 10.1%, has surpassed expectations, causing concerns among investors. This has led to a sell-off in U.S. treasuries, particularly the 10-year and two-year notes, indicating a likelihood of further rate hikes by the Federal Reserve. With an upcoming meeting in May, the Fed is expected to raise rates by 25 basis points, keeping yields elevated in the short term. The Federal Reserve is closely monitoring data on inflation, jobs, and financial stability to guide its future rate hikes. There are concerns that the U.S. economy may enter a recession in the fourth quarter, which will influence the Fed's policy decisions. While data plays a crucial role in shaping central bank policies, near-term expectations point towards sustained high yields. In Nigeria, similar trends are observed with inflation at 22.04% in March. The Central Bank of Nigeria has been actively raising interest rates, cumulating a hike of 650 basis points since May last year. Given the persistent food inflation driving overall inflation, another 50 basis points hike is anticipated at the next Monetary Policy Committee meeting. The central bank's stance remains hawkish as it continues to combat rising inflation. The tightening liquidity conditions in Nigeria have been affecting funding rates, leading to elevated yields in the government bond market. Recent auctions have seen rising Treasury bills yields due to limited participation from banks, exacerbating liquidity deficits. Despite some inflows expected from coupons and bond maturities, the market remains in a deficit position, with overnight rates capped at 19%, driving bond yields above 15%. Looking ahead, market participants anticipate increased buying interest towards the end of the week, supported by upcoming inflows and a public holiday. This sentiment is likely to drive bond prices higher and compress Treasury bill yields. Traders are adjusting their positions in anticipation of improved liquidity next week. In the bond auction space, recent trends reflect lower demand from traders and pension funds, attributed to tight liquidity conditions. The auction results indicated a slight increase in yields compared to secondary market levels, prompting some investors to selectively choose high-yielding bonds. Notably, a significant portion of demand focused on long-dated bonds due to their attractive yields. In the broader Eurobond market, countries like Kenya are facing downside risks due to dwindling reserves and slowing export revenues. With elevated rates globally, tapping into international markets may prove challenging, prompting alternative funding measures. On the other hand, Zambia is optimistic about securing a deal with the IMF, driving positive investor sentiment and tighter bond spreads. Oil-producing nations like Nigeria and Angola are supported by high oil prices, but face risks related to meeting production targets. As central banks navigate the challenges posed by escalating inflation and its impact on treasury yields, market participants closely monitor policy decisions and economic data to gauge future trends and investment opportunities.