Treasury Yields Back on the Rise

The yield on the US 10-year Treasury note rose again on Friday, topping 5.2% to reach a fresh high since mid-2007, extending a sharp sell-off over the previous three sessions that had pushed the benchmark yield up by 23 basis points. Traders refocused on hawkish comments from Fed officials, while a lack of concrete progress in US-Iran negotiations to end the conflict continued to fuel concerns about inflation. Meanwhile, the University of Michigan’s consumer sentiment survey confirmed a sharp rise in inflation expectations in September. Strong US economic data, worsening fiscal conditions and rising government debt have also weighed on the Treasury market while efforts by Treasury Secretary Bessent to cap long-dated yields through increased Treasury buybacks are widely seen as having had limited impact. Investors currently expect the Fed to raise the federal funds rate by 25bps next month, with the probability of such a move standing at around 66%.

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.