Rising Bond Yields Reach New 16-Year Highs

Bond yields continued to rise on Thursday, reaching fresh 16-year highs as traders awaited comments from Federal Reserve Chair Jerome Powell.

Yield Movement

• The yield on the 2-year Treasury BX:TMUBMUSD02Y increased by 1.3 basis points to 5.230%. Yields move in the opposite direction to prices.
• The yield on the 10-year Treasury BX:TMUBMUSD10Y rose by 5.2 basis points to 4.955%.
• The yield on the 30-year Treasury BX:TMUBMUSD30Y added 5 basis points to 5.038%.

Driving Factors

The 10-year Treasury yield was hovering just below 5%, its highest level since the summer of 2007. Investors were selling U.S. government debt due to concerns that recent strong economic data would prompt the Federal Reserve to maintain higher interest rates for a longer period. The Fed is combating inflation, which remains nearly twice its 2% target.

Traders are eager to hear if Powell will address the policy impact of the latest yield surge during his upcoming speech at the Economic Club of New York, scheduled to begin at noon Eastern.

In addition, there are concerns that significant buyers of U.S. Treasurys are reducing their holdings. The Treasury International Capital (TIC) report, released on Wednesday, revealed that foreign investors were net buyers of long-term U.S. Treasurys in August.

However, Goldman Sachs pointed out that "China was the largest net seller on our valuation-adjusted estimates."

The 5% Watch for the U.S. 10-Year: Concerns Rise Over Weaker Foreign Demand

Overview

In recent days, concerns over notably weaker foreign demand and domestic institutional buying have intensified, causing uncertainty as to the future of the U.S. 10-year treasury yield. Mohamed El-Erian, an advisor to Allianz, raised these concerns in a message on X. Experts, such as Stephen Innes from SPI Asset Management, worry that the upcoming supply of Treasuries may overwhelm the typical demand from foreign investors, upon whom the U.S. heavily relies.

U.S. Economic Updates

Upcoming economic updates for the U.S. are set to be released on Thursday, providing further insight into the state of the economy. These updates include the weekly initial jobless claims report and the Philadelphia Fed October manufacturing survey, both scheduled for release at 8:30 a.m. Eastern. Additionally, existing home sales and leading economic indicators, covering September, will be released at 10 a.m.

Comments from Fed Officials

On Thursday, several Fed officials will be making comments regarding the current economic situation. Chicago Fed President Austan Goolsbee is scheduled to speak in Madison, Wisconsin at 1:20 p.m., while Fed Vice Chair for Supervision Michael Barr will speak at a Boston Fed conference at 1:30 p.m.

Market Expectations

According to the CME FedWatch tool, market expectations suggest a 94% probability that the Fed will maintain interest rates within the current range of 5.25% to 5.50% after its next meeting on November 1. However, there is a 37% chance of a 25 basis point rate hike to a range of 5.50% to 5.75% at the subsequent meeting in December. It is projected that the Fed will not lower its Fed funds rate target to around 5% until October 2024, as indicated by the 30-day Fed Funds futures.