U.S. Treasury yields: investors weigh economic outlook

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The 10-year Treasury yield, which serves as a benchmark for mortgage rates and as an investor confidence barometer, on Tuesday surged to its highest level since 2007.

As of 8 a.m., the note rose more than 64 basis points to hit 4.727% as investors considered the state of the economy and awaited key data from the labor market that could inform Federal Reserve monetary policy.

That was the highest level since Aug. 15, 2007, when it reached 4.745%. The 2-year Treasury yield, which is sensitive to expectations around where the Federal Reserve will set its own key borrowing rate, edged higher to 5.115%.

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10-year yield

Yields and prices move in opposite directions and one basis point equals 0.01%.

Rising yields come even though U.S. lawmakers were able to avoid a government shutdown as they passed a last-minute spending bill on Saturday night. That has bought them time to finish the necessary government funding legislation. A shutdown could have negatively affected the U.S.’ credit rating as well as the country’s economy.

Investors also weighed the Fed’s next interest rates moves. Central bank officials have hinted at another rate increase and rates staying elevated for longer since their September meeting.

In recent public remarks, Fed policymakers have indicated disagreement about whether another rate hike is needed before the end of the year, but concur that rates will have to stay elevated for what could be a prolonged period of time.

The central bank’s Federal Open Market Committee has been using rate increases to bring down inflation that officials consider to be too high even though the rate has come down considerably from its peak in mid-2022.

“Inflation continues to be too high, and I expect it will likely be appropriate for the Committee to raise rates further and hold them at a restrictive level for some time to return inflation to our 2% goal in a timely way,” Fed Governor Michelle Bowman said in prepared remarks Monday.

Also speaking Monday, Fed Vice Chair for Supervision Michael Barr said it’s less important to focus on another hike and more critical to understand that rates likely will remain elevated “for some time.” And Cleveland Fed President Loretta Mester, a nonvoter this year on the FOMC, said “we may well need to raise the fed funds rate once more this year and then hold it there for some time.”

Market uncertainty remains about when and whether a rate increase may be implemented. Two central bank policy meetings remain this year, Oct. 31-Nov. 1 and Dec. 12-13. Market pricing Tuesday morning was pointing to just a 25.7% chance of a hike on Nov. 1, but a nearly 45% probability in December, according to futures pricing measured in the CME Group’s FedWatch Tool.

Investors are therefore closely watching both comments from Fed speakers and economic data expected this week.

The jump in rates has rekindled talk about market “bond vigilantes,” a term coined by economist Ed Yardeni to describe the impact when fixed income investors leave the market because of worries over U.S. debt.

Persistently high fiscal deficits are one factor in the rising costs of borrowing. Public debt has risen past $32.3 trillion this year. Debt has risen to nearly 120% of total gross domestic product.

“The worry is that the escalating federal budget deficit will create more supply of bonds than demand can meet, requiring higher yields to clear the market; that worry has been the Bond Vigilantes’ entrance cue,” Yardeni wrote Tuesdaymornning in a note titled “The Bond Vigilante Are On The March.”

“Now the Wild Bunch seems to have taken full control of the Treasury market; we’re watching to see if the high-yield market is next,” he added. “We are still counting on moderating inflation to stop the beatings in the bond market.”

August’s Job Openings and Labor Turnover Survey is due Tuesday and economists surveyed by Dow Jones are expecting it to reflect 8.8 million job openings. Other key data releases this week include September’s jobs report on Friday.  



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