Bond Report: Treasury yields volatile after hitting highest level since 2007

The benchmark 10-year Treasury yield hit a fresh 16-year peak early Tuesday in choppy trading as last week’s Federal Reserve decision and subsequent comments by officials weighed on the outlook.

What’s happening

  • The yield on the 2-year Treasury
    fell by 2.6 basis points to 5.123%.

  • The yield on the 10-year Treasury
    retreated 2.4 basis points to 4.512% after rising to a new 16 year high.

  • The yield on the 30-year Treasury
    fell 1.4 basis points to 4.640%.

What’s driving markets

Lingering concerns that the Federal Reserve will raise interest rates further, and keep them elevated for longer pushed the 10-year Treasury yield to a fresh 16-year high near 4.57% early Tuesday before slipping again. The move followed last week’s Federal Reserve projections and recent hawkish chatter from officials.

Comments by JPMorgan boss Jamie Dimon that rates could go as high as 7% may have added to the bearish sentiment. However, buying emerged that pushed yields back down a few basis points on the day to 4.51%.

Traders are looking ahead to the Fed’s favored inflation gauge, the core personal consumption expenditure price index, which will be published on Friday.

Until then, markets are pricing in an 82% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on November 1, according to the CME FedWatch tool.

The chances of a 25 basis point rate hike to a range of 5.50 to 5.75% at the subsequent meeting in December is priced at 35%.

The central bank is not expected to take its Fed funds rate target back down to around 5% until September 2024, according to 30-day Fed Funds futures.

U.S. economic updates set for release on Tuesday include the S&P Case-Shiller home price index for July, released at 9 a.m. Eastern, followed at 10 a.m. by August new home sales and September consumer confidence.

Federal Reserve Governor Michelle Bowman is due to speak at 1:30 p.m.. The Treasury will auction $48 billion of 2-year paper on Tuesday.

What are analysts saying

“The recent rise in yields is partly because investors are pricing in that policy rates will remain higher for longer, particularly after the Fed’s dot plot last week. But it’s also been driven by the growing realization that supply is set to remain elevated given mounting budget deficits, along with a small uptick in longer-term inflation expectations,” said Jim Reid, strategist at Deutsche Bank.

” So after a decade plus of having little value in historical terms, it [the sovereign bond sector]is finally a competitive asset class again against others such as equities, which raises the question about what return equity investors should demand going forward,” Reid added,

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