The 10-year U.S. Treasury yield retreated on Friday, after surging above 1.6% in the previous session.
On Thursday, the 10-year yield jumped more than 16 basis points to 1.614%, its highest level since February 2020 and more than half a percentage point up on the end of January.
The move unnerved investors and put pressure on stock markets, with the Nasdaq suffering its worst one-day loss since October. Stocks fell again on Friday, with the Dow Jones Industrial Average slipping more than 200 points.
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The spike in the 10-year yield, which is used as a benchmark for mortgage rates and auto loans, has been driven by expectations of improving economic conditions as coronavirus vaccines are rolled out, as well as fears of higher inflation.
"Greater optimism on the economic outlook has led to US yields breaking above the widely watched 1.5% threshold, driven by real rates," Barclays equity strategist Emmanuel Cau told clients. "Ultimately, rising growth and inflation expectations are bad for bond returns and good for equities. It means the positive yield/equity correlation of the last few months is unlikely to diminish, as long as central banks err on the side of caution and contain the rebound in real rates. Dips due to bond market volatility should thus be bought into, in our view."
The U.S. House of Representatives is set to approve the $1.9 trillion Covid relief spending package by Friday, bolstering expectations of economic recovery.
However, Wells Fargo strategists said in a note Thursday that they believed "the odds have been increased the Fed will have to attempt to talk down the recent move higher in rates."
Meanwhile, Hans Mikkelsen, credit strategist at Bank of America, said that since the summer economists had "consistently underestimated economic growth to an extent never seen before."
"There appears a real risk the Fed is not going to be able to sound dovish much longer and that transition could see wider credit spreads," he said.
Personal income rose for its biggest monthly gain since April 2020 though inflation remained tame, the Commerce Department reported Friday. Personal income jumped 10% after 0.6% increase in December. That was even higher than the 9.5% Dow Jones estimate.
The personal consumption expenditures price index, which is the Federal Reserve's preferred inflation gauge, rose 0.3% for the month, slightly ahead of the 0.2% expectation but was up just 1.5% year over year, matching Dow Jones estimates. That number was the same both for the headline rate and the core, which excludes volatile food and energy prices.
There are no auctions due to be held on Friday.
— CNBC's Patti Domm, Jeff Cox and Bob Pisani contributed to this report.