Treasury Yields Ease After Early Rise

The yield on the 10-year US Treasury note rose past 4.7%, not far from the 19-month high of 4.75% tested last week as lingering concerns of inflation and increasing credit supply extended the aversion to bonds in the long end of the curve. Oil prices rose further as President Trump signaled there was no rush to end the blockade against Iran energy, preventing the flow of tankers from the Persian Gulf. Higher energy prices lifted underlying inflation this year, although a softer CPI cooled immediate worries. Still, concerns that the Federal Reserve may be complacent against inflation were reflected by the surge in long-dated yields. These were initially flagged by Fed Chair Warsh stating a rate hike may not be the preferred tool to combat higher prices. Lastly, debt issuance in the US soared as AI companies raised $1.5 trillion in bonds this year, lifting the supply of dollar-denominated fixed-income that could limit the relative appetite for Treasury securities.

The yield on the 10-Year US Treasury note held around 4.69% on Monday after rising about 5 basis points in the previous session, reflecting concerns that the Federal Reserve may be complacent about inflationary risks in the US economy amid persistent tensions in the Middle East. The interim ceasefire agreement between the US and Iran is set to formally expire later today, with negotiations to end the conflict and reopen the Strait of Hormuz remaining deadlocked. Year-ahead inflation expectations compiled by the University of Michigan rose in August, marking a fifth consecutive month above the 4% level. Meanwhile, data released last week pointed to subdued US inflation, while consumer sentiment and retail sales declined. Markets now see roughly a 67% probability that the Fed will hold rates in September, up from below 50% a month ago.

The yield on the 10-Year US Treasury note swung upward to the 4.7% mark on Friday, not far from the 19-month high of 4.75% tested earlier in the week on renewed aversion to bonds on the long end of the curve. Year-ahead inflation expectations compiled by the University of Michigan rose in August, a fifth month above the 4% level. This was aligned with lingering concerns that the Federal Reserve may be complacent to inflationary risks in the US economy, recently exacerbated by the surge in energy prices due to the war in the Middle East. Signals from Fed Chair Warsh that a rate hike may not be his preferred instrument against inflation drove long-dated yields to surge, with the 30-year bond rising to a 19-year high. Treasuries were also pressured by concerns that Japan could sell some of their ample reserves should the Ministry of Finance defend against a weak yen again. Treasuries undercame selling pressure despite softer-than-expected producer prices and weak retail sales data.