US Yields Push Higher Amid Inflation Fears

The yield on the US 10-year Treasury note edged up to 5.26% on Friday, following a volatile session on Thursday, when the benchmark yield fell 6 b+s from its highest level since 2002. Investors continued to assess developments in the Middle East and their implications for energy prices and inflation. Oil prices eased after US President Trump pledged to refrain from attacking Iran until after the midterm elections. Nevertheless, markets continued to price in the possibility that the Fed would need to keep interest rates elevated for longer to contain persistent inflationary pressures. The probability of the Fed holding rates steady this month stood at around 81%, while the odds of a 25bps rate hike in December were approximately 69%. For the week, the 10-year Treasury yield was down about 5bps. Meanwhile, strong demand at this week’s 10-year and 30-year Treasury note auctions suggested that investors remained willing to purchase longer-dated government debt despite the recent sell-off.

The yield on the US 10-year Treasury note held around 5.23% on Friday, holding a pullback from 24-year highs following a well-received 30-year bond auction, suggesting investors remain willing to purchase long-dated government debt despite the recent market selloff. Investors also weighed easing oil prices after President Donald Trump said the US was engaged in “productive discussions” with Iran and would refrain from attacking the country before the midterm elections. Meanwhile, markets are pricing in roughly an 82% chance that the Federal Reserve will leave interest rates unchanged this month, while the probability of a December rate hike stands at around 81%. On Thursday, Fed Governor Christopher Waller said additional rate increases would likely be needed to bring inflation back to the central bank’s 2% target. However, he emphasized that policymakers had “flexibility” over the pace of tightening, leaving open the possibility of a pause at the Fed’s upcoming October meeting.

The yield on the US 10-year Treasury swung around 5.3% on Thursday, after hitting a fresh 24-year high of 5.35% earlier in the session. The move came as traders continued to assess renewed gains in oil prices, which are adding to inflationary pressures and, in turn, reinforcing expectations of further Fed tightening. Minutes from the Fed’s September meeting showed that most policymakers expect another increase in the federal funds rate this year, although the timing remains uncertain. Fed Governor Waller said on Thursday that additional rate hikes will likely be needed to bring inflation back to target, while emphasizing that there is “flexibility” around the pace of increases. Markets currently price an around 78% probability of the Fed holding rates steady in October, while the odds of a 25bps hike in December stand at around 69%. Meanwhile, today’s 30-year Treasury auction will provide a further test of demand for longer-dated government debt.