US 10-Year Yield Approaches 5-Month High

The yield on the 10-year US Treasury note rose above 4.27%, approaching the five-month high of 4.3% on January 20th, as markets assessed the outlook for growth and monetary policy by the Federal Reserve under incoming Chairman Kevin Warsh. Markets pulled away from the safety of Treasuries on fresh strength for precious metals, after their selloff drove major exchanges to significantly increase margin requirements for open positions and impact other asset classes. In the meantime, fixed-income investors continued to assess how Warsh may guide the FOMC this year. The soon-to-be Chairman is seen as an inflation hawk and has previously opposed a larger Fed balance sheet during the global financial crisis, widening the US yield curve at the turn of the month. Yields also increased after fresh data from the ISM reflected an unexpected rebound in the US manufacturing sector.

The yield on the US 10-year Treasury note was little changed around 4.29% on Tuesday, after rising by about 4bps in the previous session as traders reassess the monetary policy outlook under the new Fed Chair, Warsh. Investors continue to expect the Fed to cut the federal funds rate twice this year, potentially in June and October. Meanwhile, key labour market data including the JOLTS survey and the monthly jobs report due this week will be delayed due to the partial US government shutdown. House Republican leaders are expected to vote on Tuesday on a government funding package already approved by the Senate. Separately, the US Treasury Department said it now expects to borrow $574 billion in Q1, $3 billion less than projected in November, mainly reflecting a higher cash balance at the start of the quarter. Investors will be watching for further details due on Wednesday, particularly regarding any increase in issuance of longer-dated bonds.

The yield on the 10-year US Treasury note held around 4.27% on Tuesday, following a sharp rise in the previous session, as strong U.S. economic data pushed back expectations for the Fed to cut rates. Monday’s data showed a surprise expansion in US factory activity, signaling strength for the economy and corporate profits. Investors now turn to Friday’s monthly jobs report, although its release could be delayed by a partial government shutdown. Last Friday, President Donald Trump nominated Kevin Warsh to succeed Fed Governor Jerome Powell. Markets view Warsh as a relatively hawkish pick who may favor lower interest rates, though less aggressively than other candidates. Warsh is also seen as an inflation hawk and previously opposed expanding the Fed’s balance sheet during the global financial crisis, a stance that contributed to a widening of the US yield curve at the start of the month.