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Bond Report: Treasury yields carve out more 11- to 15-year highs as traders focus on rate hikes, U.K.’s Truss resigns


Two-, 10- and 30-year Treasury yields rose further to post their highest levels in more than a decade on Thursday, as traders continued to factor in higher interest rates while the resignation of U.K. Prime Minister Liz Truss ushered in hope for a period of fiscal prudence.

What happened

The yield on the 2-year Treasury note

rose 5.8 basis points to 4.608% from 4.55% on Wednesday afternoon. Thursday’s level was the highest since Aug. 8, 2007, based on 3 p.m. figures from Dow Jones Market Data.

The yield on the 10-year Treasury yield

advanced 9.8 basis points to 4.225% from 4.127% as of Wednesday. Thursday’s level was the highest since June 17, 2008.

The yield on the 30-year Treasury

climbed 8.8 basis points to 4.213% from 4.125% on Wednesday. That was the highest level since July 28, 2011.

What drove markets

The 10-year Treasury yield broke through 4.2% to reach another 14-year high on Thursday amid lingering fears of more interest rate increases to come from the Federal Reserve.

Meanwhile, the monetary policy-sensitive 2-year Treasury yield has jumped 384.4 basis points since the start of the year in response to the Fed’s attempts to push inflation back down to its 2% target.

The renewed climb in Treasury yields came after Thursday’s resignation by the U.K.’s Truss sent the pound higher and data released on Wednesday showed U.K. consumer prices rising at a 40-year high of 10.1%.

See: Vanguard ‘not confident’ U.S. Treasury rates have peaked after painful bond-market losses. Why ‘risk-reward profiles’ still appear more attractive across fixed income

Markets are pricing in a 99.9% probability 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 mostly expected to take its fed-funds rate target to between 5% and 5.25%, or even higher, by next March, according to the CME FedWatch tool.

In Thursday’s economic releases, U.S. weekly jobless claims dropped to a three-week low of 214,000 in mid-October, below the 230,000 expected by economists polled by The Wall Street Journal. The Philadelphia Fed’s gauge of regional business activity inched up to negative 8.7 in October from negative 9.9 in the prior month. And existing home sales fell again in September, by 1.5%.

What analysts are saying

“Bond investors are accepting the idea of two more 0.75% increases by the Fed,” which would lift the fed-funds rate target to between 4.5% and 4.75% by December, according to Bryce Doty, senior portfolio manager and vice president of Sit Investment Associates. 

“Regardless of the ever-changing, near-term expectations for rate increases, expectations for cuts in the second quarter of 2023 remain constant,” Doty wrote in an email. “Either the Fed recognizes what a mistake it is to destroy jobs when there is such a labor shortage like we’ve never seen before and pause(s) or continue(s) to raise rates aggressively, creating a massive hard landing resulting in an abrupt about-face on rates.”

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