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U.S. benchmark bond yields rose to fresh cycle highs on Monday, driven partly by worries about more debt supply in the U.K. which sent the 2-year gilt’s rate soaring.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
4.208%
rose to 4.226% from 4.212% on Friday. Friday’s level was the highest since Oct. 12, 2007, based on 3 p.m. yields, according to Dow Jones Market Data. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.770%
climbed to 3.753% from 3.695% Friday afternoon. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.642%
advanced to 3.639% from 3.611% late Friday.
What’s driving markets
Global bond yields continued to move higher as the prospect of tighter monetary policy to combat inflation, along with fears in the U.K. about increased issuance to fund fiscal splurges, damped investor appetite for fixed-income assets.
At one point on Monday, the 10-year Treasury yield flirted with 3.8%, its highest since the spring of 2010, and the 2-year note briefly breached 4.3%, a 15-year peak.
Markets are pricing in a 70% probability that the Federal Reserve will raise interest rates by another 75 basis points to a range of 3.75% to 4% on Nov. 2 as it tries to combat inflation running near 40-year highs.
The central bank started the year with borrowing costs near zero and is mostly expected to take its fed-funds rate target to at least between 4.5% and 4.75% by next March, according to the CME FedWatch tool.
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., the Chicago Fed national activity index fell to zero in August from a revised 0.29 in July. On Monday afternoon, the Treasury will auction $43 billion of 2-year notes. Investors will also hear from four Federal Reserve regional bank presidents throughout the day.
What analysts are saying
This year “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 and toward the global response to the Fed’s torrent pace of easing,” they said, with particular focus currently on the U.K.
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