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Bond Report: 30-year Treasury yield hits eight-year high as traders factor in higher U.S. rates

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Two- and 10-year U.S. bond yields advanced to two-week highs on Tuesday, while the 30-year reached its highest level since 2014, as traders priced in the prospects of rising interest rates and turned their attention to the next major inflation report later this week.

What’s happening

The yield on the 2-year Treasury
TMUBMUSD02Y,
4.295%

rose less than 1 basis point to 4.314% from 4.306% on Friday. Tuesday’s level is the highest since Sept. 26, based on 3 p.m. data from Dow Jones Market Data.

The yield on the 10-year Treasury
TMUBMUSD10Y,
3.932%

climbed 5.5 basis points to 3.938% from 3.883% Friday afternoon, after climbing to as high as 3.999% earlier in the day. Tuesday’s level is the highest since Sept. 27.

The yield on the 30-year Treasury
TMUBMUSD30Y,
3.908%

rose 6.1 basis points to 3.902% from 3.841% as of Friday. That’s the highest since Jan. 8, 2014.

The bond market was closed on Monday for the Columbus Day holiday in the U.S.

What’s driving markets

The Treasury market returned from its holiday weekend with benchmark yields hovering around cycle highs. The benchmark 10-year Treasury yield
TMUBMUSD10Y,
3.932%

briefly popped to almost 4% — challenging its highest level since 2008 — early Tuesday before pulling back as the New York trading session wore on.

Meanwhile, the International Monetary Fund indicated that the global economy is at its most vulnerable moment since the 2020 onset of the Covid-19 crisis and warned of a general lack of liquidity in markets, especially for government debt.

Markets are pricing in an 83% likelihood that the Fed will raise interest rates by another 75 basis points, to a range of 3.75% to 4%, on Nov. 2. The central bank is also mostly expected to take its fed-funds rate target to at least between 4.5% and 4.75% by March, according to the CME FedWatch tool.

In remarks made on Tuesday, Cleveland Fed President Loretta Mester said she sees larger risks coming “from tightening too little and allowing very high inflation to persist and become embedded in the economy.”

Indeed, while the New York Fed’s consumer expectations survey showed inflation expectations continued to decline in the short term, they’ve increased slightly in the medium and longer terms.

Traders were looking ahead to reports and data later in the week as potential catalysts for the next moves. On Wednesday, the U.S. producer prices data for September and the minutes of the Fed’s last meeting will be released. Thursday will bring the U.S. September consumer-price index.

Also pressuring bond prices of late has been volatility in the U.K. gilt market, which experienced a spiral of selling after investors were spooked by the government’s plan for large debt-funded tax cuts. On Tuesday, the Bank of England expanded its intervention into the market to protect pension funds from forced liquidations of bond portfolios.

What strategists are saying

“We update our rate forecast using a probabilistic approach and illustrative scenarios for the fed-funds rate and term premia,” said Deutsche Bank strategists Matthew Raskin and Steven Zeng. “We take the [Deutsche Bank U.S. economics] team’s funds rate forecast as our baseline and view the balance of risks as skewed towards more persistent inflation and higher policy rates.”

“We project a peak 10y UST of 4.2% this quarter vs. our prior forecast peak of 3.85%,” they said in the summary of a note.

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