By Dhara Ranasinghe

LONDON (Reuters] -U.S. Treasury yields fell sharply after Russia invaded Ukraine on Thursday as investors piled into sovereign U.S. debt.

Officials and media reported that Russian forces attacked several areas in Ukraine with missiles and also landed troops at its coast. This was after President Vladimir Putin had authorized what he called an “extraordinary military operation in east”.

This news caused a plunge in stock markets around the world, pushing investors to safer havens like U.S. Treasuries or gold. U.S. stock markets were less than 2%, which points to large losses on Wall Street.

London’s trade was gaining momentum, and so did a decline in the yields of government bonds.

Last day, yields on benchmark 10-year Treasury were down by almost 15 basis point (bps), at 1.85%. This was the largest drop in daily yield since late November.

Chris Scicluna of Daiwa Capital Markets London, said “There is clearly no risk appetite today and lots of uncertainty.”

Yields across the U.S Treasury curve were significantly lower today, with yields dropping around 13 basis points to 1.47% for the two-year term.

The European sovereign debt markets also saw this trend, with German Bund yields set to experience their largest daily fall since March 2020, the date when COVID-19 destabilized world markets.

In the meantime, money market futures suggested that investors continued to place aggressive bets on Federal Reserve interest rate increases.

Although the market still believes in a Fed-mandated 25 bp rise at their March meeting, the odds of a Fed move in excess of 50 bps are now less likely due to the increasing geopolitical tensions.

Justin Onuekwusi (portfolio manager at LGIM) said the expectations about the amount of rate increases this year are being reduced despite the effect on inflation by rising energy prices. It was because there is the possibility that the wrong time could come to begin taking liquidity out the markets.

He said that central banks might have to deal with an inflation spike but it could lead to rate increases which are much larger.

Rainer Guntermann (DE: Rates Strategist at Commerzbank) noted that there was a decrease in rates hike expectations. This is also apparent in the decline in Treasury curve moves.

His comments included that “the Treasury curve moved down basically parallel between two-year and 10-year overnight, the liquid part being 10s so also 2 years, which probably is a reflection on less rate rises.”

As fears about global disruptions of energy supply were heightened by Russia’s invasion of Ukraine, oil prices soared to $100 per barrel, the highest level since 2014.[O/R]

The yields of inflation-linked bonds dropped as investors tried to shield themselves from inflation risk. Inflation-Protected Securities, 10-year Treasury Inflation Protected Securities (TIPS), saw their yields fall to as low at -0.71% in the last three weeks.