The 10- and 30-year Treasury yields moved up from their highest levels since July on Monday as investors reassessed the Federal Reserve’s policy trajectory and awaited remarks by Chairman Jerome Powell from Jackson Hole at the end of the week.
What’s happening
- The yield on the 2-year Treasury TMUBMUSD02Y, 3.305% rose to 3.293% from 3.265% on Friday. Yields move in the opposite direction to prices.
- The yield on the 10-year Treasury TMUBMUSD10Y, 3.020% advanced to 3.013% versus 2.987% late Friday.
- The yield on the 30-year Treasury TMUBMUSD30Y, 3.265% was 3.254% versus 3.225% on Friday.
The 10-year to 2-year spread of minus 27.7 basis points is narrower than recently, but remains deeply inverted, signaling a looming economic downturn.
What’s driving markets
The recent trend for yields is higher again. Benchmark yields are back above 3% as many traders see the Fed as determined to reaffirm its intention to quash inflationary pressures by aggressively raising interest rates. The policy-sensitive 2-year yield is close to the highest level in more than a decade.
“The Fed has pushed back consistently against the market’s pricing of a Fed turnaround to easing rates next year with partial success, as expectations for rate cuts have shifted farther out the curve and from higher levels,” said strategists at Saxo Bank.
The Saxo strategists said the key test for markets this week may come on Friday when the Fed’s preferred measure of inflation, the July PCE inflation data, is released, and Fed Chair Powell speaks at the Jackson Hole Symposium.
The 10-year Treasury yield has fallen from an 11-year high of about 3.5% in June to as low as 2.5% by the start of August on hopes that signs of peak inflation meant the Fed could slow its pace of rate hikes and even start trimming borrowing costs in 2023.
Markets are pricing in a 54.5% probability that the Fed will raise interest rates by another 75 basis points to a range of 3% to 3.25% at its Sept. 20-21 meeting. Traders see a more than 50% chance that the central bank takes its borrowing costs to between 3.75% and 4% or higher by March 2023, according to fed funds futures.
Data released on Monday showed the U.S. economy had some momentum in July. The Chicago Fed National Activity Index rose to 0.27 in July from a revised reading of minus 0.25 in June, beating the minus 0.10 consensus forecast from economists polled by FactSet.
What analysts are saying
“We believe the Fed will need to see convincing evidence that inflation is well on its way back to target before it is willing to cut rates. The Fed likely does not need to see inflation fall all the way back down to 2% but needs to trust there has been sufficient demand destruction to soon reach its inflation target,” said rates strategist Meghan Swiber and others at BofA Securities.
“Cuts in late-2023, as the market and our economists currently anticipate, are feasible under the conditions that inflation declines towards target and we see a moderation in jobs growth,” the BofA team wrote in a note.