US 10-Year Yield Holds Advance

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.

The yield on the 10-year US Treasury note was at 4.65% on Friday, dropping after testing 19-month highs of 4.75% on Tuesday as recent economic data limited the urgency for the Federal Reserve to raise interest rates. Producer prices were firmly under expectations in July and consumer inflation slowed for a second consecutive month, suggesting that the rebound in energy prices had limited impact on higher price growth. In turn, retail sales unexpectedly contracted in the period, driving part of the market to consider momentary weakness for consumers. Still, the drop in yields were more muted in the longer end of the curve as lingering risks on energy supply maintained inflationary risks in the near term. This was magnified by the trend of a weakening Japanese yen, risking selling pressure from the largest foreign holder of US Treasury notes should the country intervene in the foreign exchange market. Such concerns were reflected by a sharp tail in the latest 30-year bote auction.