Yield on Treasury Bonds Surges to a 16-Year High

The benchmark Treasury yield reached a new 16-year high early Tuesday amidst volatile trading, as market participants grappled with the impact of potential rate hikes by the Federal Reserve.

Major Developments

• The yield on the 2-year Treasury bond fell by 2.6 basis points to 5.123%. It is worth noting that yields move in the opposite direction to prices.
• The yield on the 10-year Treasury bond retreated 2.4 basis points to 4.512%.
• The yield on the 30-year Treasury bond also fell, dropping by 1.4 basis points to 4.640%.

Driving Factors

Investors are concerned about the possibility of the Federal Reserve implementing further interest rate hikes and maintaining them at elevated levels for a longer duration. These fears have been further exacerbated by recent comments and projections from the Federal Reserve, resulting in the 10-year Treasury yield reaching a fresh 16-year high near 4.57% early Tuesday.

Moreover, Jamie Dimon, CEO of JPMorgan Chase, suggested that rates could potentially climb as high as 7%, thus causing increased momentum behind the rising yields. However, the session has proven to be volatile, witnessing a sudden surge in bond buying that pushed yields back down a few basis points to 4.51%.

Market participants are closely monitoring the release of the core PCE price index, which is the Federal Reserve's preferred inflation gauge. This report is scheduled to be published on Friday.

In the meantime, market indicators currently predict an 82% probability that the Federal Reserve will maintain interest rates at their current range of 5.25% to 5.50% after its next meeting on November 1, according to the CME FedWatch tool.

The Path to a Rate Hike

Market expectations place a 35% chance of a 25 basis point rate hike in December, bringing the range to 5.50-5.75%. However, analysts predict that the central bank will not lower its Fed funds rate target back to around 5% until September 2024, based on 30-day Fed Funds futures.

Key Economic Updates

On Tuesday, key U.S. economic updates will be released. At 9 a.m. Eastern, the S&P Case-Shiller home price index for July will be published, followed by August new home sales and September consumer confidence at 10 a.m.

Featured Speaker and Auction

Federal Reserve Governor Michelle Bowman is scheduled to speak at 1:30 p.m. Additionally, the Treasury will be auctioning $48 billion worth of 2-year papers on Tuesday.

Analyst Insights

According to Jim Reid, a strategist at Deutsche Bank, the recent increase in yields is influenced by multiple factors. Investors are pricing in the anticipation of sustained higher policy rates, as indicated by the Fed's dot plot last week. Additionally, mounting budget deficits and a slight uptick in longer-term inflation expectations contribute to the elevated supply levels. As a result, the sovereign bond sector has regained its competitive asset class status, offering an alternative to equities. This raises questions about the future return equity investors can expect.