Treasury Yields Rise as Bond Market Weighs Elevated Interest Rates

Treasury yields experienced an increase on Monday, as the recent surge in prices began to fade. The bond market faced the challenge of elevated interest rates.

What's Happening

• The yield on the 2-year Treasury (BX:TMUBMUSD02Y) saw an increase of 2.6 basis points, reaching 5.075%. It's important to note that yields move in the opposite direction of prices.
• The yield on the 10-year Treasury (BX:TMUBMUSD10Y) rose by 7 basis points, reaching 4.697%.
• The yield on the 30-year Treasury (BX:TMUBMUSD30Y) experienced a decrease of 8.3 basis points, reaching 4.849%.

What's Driving the Market

The rally in Treasury prices, which caused yields to decrease significantly in recent weeks, began to fade early on Monday.

The benchmark 10-year Treasury yield reached a 16-year high of approximately 4.88% on October 4th. This surge was driven by investor expectations that stronger-than-expected U.S. economic data would prompt the Federal Reserve to further raise interest rates.

However, in the past week, yields dropped more than 30 basis points as Fed officials hinted that the central bank might be finished with rate hikes.

On Monday, some of the earlier decline was reversed, potentially due to investors withdrawing from sovereign bonds as Israel did not initiate a full ground offensive into Gaza over the weekend.

Several U.S. economic updates are scheduled for release on Monday, including the Empire State manufacturing survey for October, which is expected at 8:30 a.m. Eastern Time.

Philadelphia Fed President Patrick Harker Scheduled to Speak

Philadelphia Fed President Patrick Harker is set to deliver two speeches today, one at 10:30 a.m. and another at 4:30 p.m. This will provide valuable insights into the current state of the economy and the potential future actions of the Federal Reserve.

Market Expectations for Upcoming Fed Meeting

The market is currently pricing in a 90% probability that the Federal Reserve will maintain interest rates at their current range of 5.25% to 5.50% during its next meeting on November 1. This is according to the CME FedWatch tool, which provides an estimation based on market sentiment.

Possibility of Rate Hike in December

Looking ahead, there is a 30% chance of a 25 basis point rate hike, bringing the range to 5.50% to 5.75%, at the subsequent meeting in December. This indicates that there is some speculation among investors regarding a potential increase in interest rates.

Long-Term Interest Rate Outlook

The central bank is not expected to lower its target for the Fed funds rate to approximately 5% until August 2024, as predicted by 30-day Fed Funds futures. This suggests that interest rates will remain relatively stable in the coming years.

Key Events and Data Points to Monitor

Aside from the ongoing events in the Middle East, this week appears to be quite busy in terms of financial developments. However, there is no specific focal point that stands out. It is worth noting that there will be multiple speeches by Federal Reserve officials before the media blackout over the weekend. Of particular interest is Powell's speech at the Economic Club of New York, scheduled for Thursday.

In addition, the upcoming U.S. retail sales data, expected to be released tomorrow, will likely be a significant data point to watch. Forecasts suggest a potential decline of -0.1% after two strong months. Moreover, there is a plethora of U.S. housing data, including the NAHB report (tomorrow), starts/permits (Wednesday), and existing home sales (Thursday). Lastly, the U.S. weekly jobless claims, set to be published on Thursday, correspond to the payrolls survey week and will help fine-tune estimates.

Overall, these events and data releases will provide valuable insights into the current state of the U.S. economy and may influence market sentiment and expectations moving forward.