U.S. benchmark bond yields rose to fresh cycle highs on Monday, as worries about more debt supply sparked a rout in U.K. peers.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
4.312%
rose 7 basis points to 4.282%. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.794%
climbed 7.5 basis points to 3.763%. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.674%
added 3.8 basis points to 3.650%.
What’s driving markets
Global bond yields continued to move higher as the prospect of tighter monetary policy to combat inflation and fears about increased issuance to fund fiscal splurges damped investor appetite for fixed income assets.
The 10-year U.S. Treasury yield at one point flirted with 3.8%, its highest since the spring of 2010, and the 2-year note briefly breached 4.35%, a 15-year peak.
Markets are pricing in a 76% probability that the Federal Reserve will raise interest rates by another 75 basis points to a range of 3.75% to 4.00% after its meeting on November 2nd as it tries to combat inflation running near 40-year highs.
The central bank started the year with borrowing costs at zero and is expected to take its Fed funds rate target to 4.75% by May 2023, according to the CME FedWatch tool.
Strategists noted that some of the latest moves in Treasuries were driven by developments abroad.
“2022 has been defined by global inflation pressures and the measures being taken by authorities to counteract that inflation pressure. For months, that story has been dominated by the Fed, with the rest of the world struggling to keep up,” said rates strategists at Nat West Markets.
“But one has to wonder if these past few days mark a bit of a turning point away from the specifics of the Fed as the dominant market driver,” they added, with particular focus currently on the U.K.
Two-year U.K. gilt yields
TMBMKGB-02Y,
have surged more than 90 basis points in just the last two sessions after new Chancellor of the Exchequer Kwasi Kwarteng delivered a tax-cutting budget that would be funded by an extra £62 billion of bond sales.
Traders are now increasing bets that the move will prove inflationary — particularly as a slumping pound raises import costs — and will cause the Bank of England to hike interest rates by more than previously thought: possibly taking them as high as 5.25% according to Bank of America.
Back in the U.S. there are a number of regional Fed president speakers on the slate for Monday. Boston’s Susan Collins talks at 10 am; Atlanta’s Raphael Bostic takes the mic at 12 noon; Lorie Logan of Dallas speaks at 12:30 pm; and Cleveland’s Loretta Mester will deliver some words at 4 pm. All Eastern.
U.S. economic updates set for release on Monday include the Chicago Fed national activity index for August, due at 8:30 am Eastern.
The Treasury will auction $43 billion of 2-year notes on Monday.
