Treasury Yields Edge Lower But Remain at Multi-Year Highs

The yield on the 10-year US Treasury note fell to 5.17% on Friday, following a sharp sell-off over the previous three sessions that pushed the benchmark yield up 23bps to around 5.20%. A decline in oil prices, amid signs that US and Iranian negotiators may be exploring a phased agreement to reopen the Strait of Hormuz, provided some relief to the bond market. Despite the modest pullback, borrowing costs remain at 2007 highs, as markets continue to price in expectations that the Federal Reserve will need to tighten monetary policy further. The odds of another 25bps rate hike at the Fed’s next meeting currently stand at around 70%, while swaps are pricing in three additional quarter-point rate increases over the next year. Strong economic activity and concerns over the fiscal outlook have also weighed on Treasuries. While demand at Tuesday’s 2-year Treasury auction was robust, the 5-year Treasury auction drew unexpectedly weak demand.

The yield on the US 10-Year Treasury note eased below 5.2% on Friday, but stayed close to its highest level since 2007, while the 30-year yield stood around 5.48%, near 2004 highs. Borrowing costs have climbed as elevated oil prices and resilient US economic data fueled inflation concerns, strengthening expectations that the Federal Reserve may tighten policy further. Markets are currently pricing in roughly a 67% probability of a Fed rate hike in October, following the first increase in three years last week. Meanwhile, the US Treasury Department on Thursday repurchased $4.078 billion of 20- and 30-year bonds as part of its ongoing buyback program. The amount fell short of the $10.4678 billion in bonds offered during the operations and was also below the $6 billion in debt the Treasury had said it planned to purchase. Investors now await the University of Michigan consumer sentiment report and durable goods data on Friday for further clues on the strength of the US economy.

The yield on the US 10-year Treasury note topped 5.15% before retreating slightly to around 5.1% on Thursday, remaining at 2007-highs. Meanwhile, the 30-year yield climbed above 5.44%, its highest level since 2004. Borrowing costs have risen as oil prices moved higher amid elevated tensions between the US and Iran, while talks on the sidelines of the UN General Assembly have made little progress toward ending the conflict. Higher energy prices are likely to add further pressure on inflation, particularly as US diesel prices hit a new record high. Against this backdrop, traders have increased bets on further Fed tightening this year. Markets are now pricing nearly a 64% chance of another 25 bps rate hike in October and more than a 48% probability of a similar move in December. Recent comments from several Fed officials have also been perceived as hawkish. Adding to pressure on the bond market, the September S&P Global PMI pointed to continued strength in US economic activity.