Yields on U.S. Treasurys retreated Monday as investors expressed relief over the British government’s decision to rescind proposed tax cuts that had sparked chaos in U.K. government bonds.
What yields are doing
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The yield on the 2-year Treasury note
TMUBMUSD02Y,
4.451%
fell to 4.435%, down from 4.507% at 3 p.m. Eastern on Friday. The 2-year’s Friday finish was the highest since Aug. 8, 2007, based on 3 p.m. figures, according to Dow Jones Market Data. Yields and debt prices move opposite each other. -
The 10-year Treasury note
TMUBMUSD10Y,
3.985%
yielded 3.953%, down from 4.005% Friday afternoon. Friday’s level was its highest since Oct. 15, 2008. -
The yield on the 30-year Treasury bond
TMUBMUSD30Y,
3.993%
fell to 3.956% from 3.974% late Friday. Friday’s level was its highest since Aug. 1, 2011.
Market drivers
Yields on U.K. government bonds, known as gilts, fell sharply on Monday after new Chancellor of the Exchequer Jeremy Hunt abandoned the majority of the £45 billion ($51 billion) in previously announced unfunded tax cuts that were blamed for sparking a bout of global market volatility and stoking fears of a broader breakdown of the financial system.
Hunt also pulled back on the government’s energy-price guarantee, which was to support households and businesses for two years. It will now remain universal until April 2023 and therefore will cost taxpayers “significantly less than planned,” he said.
Read: Who is Jeremy Hunt? Meet the new U.K. chancellor
Hunt replaced Kwasi Kwarteng, who was fired by Prime Minister Liz Truss at the end of last week. The tax cuts and energy-relief plan, unveiled at the end of last month, had sent U.K. bond yields soaring, stirring spillover effects in financial markets and pushing up U.S. Treasury yields. The Bank of England stepped in to buy U.K. government bonds in an effort to stabilize the market and prevent an implosion of pension funds, but with an Oct. 14 deadline.
Also see: Why Kwasi Kwarteng could not survive the battle with the Bank of England
In the U.S., Monday’s only major data release showed that New York factory activity stumbled in October. The New York Fed’s Empire State business conditions index, a gauge of manufacturing activity in the state, fell 7.6 points to negative 9.1.
Investors appeared to have moved on since Thursday’s U.S. consumer-price index report, which included a year-over-year headline rate of 8.2% and hotter-than-expected monthly core reading of 0.6%. The data cemented expectations for a 75-basis-point rise in the fed-funds target rate at the Federal Reserve’s November policy meeting, while also boosting the possibility of another move of the same size at its December meeting.
What analysts say
“The trading week began on somewhat calmer footing in the Treasury market as investors continue to evaluate how the shifting fiscal agenda in London will develop and what that means for the pound and gilt yields,” said BMO Capital Markets rates strategists Ben Jeffery and Ian Lyngen.
“The relatively light nature of the data calendar this week leaves the solid slate of incoming Fed rhetoric relatively more tradable in the wake of CPI and given that it will be monetary policy makers’ final opportunity to offer official commentary ahead of the November meeting,” they wrote in a note.
