Treasury Sell-Off Eases

The yield on the US 10-year Treasury note topped 5.3% on Thursday, its highest level since early 2002, before retreating slightly to 5.27%. The bond market has remained under pressure amid expectations of further monetary policy tightening by the Fed, as persistent inflationary pressures from higher oil prices and the lack of a resolution to the Middle East conflict continue to weigh on sentiment. Concerns over the US fiscal and debt outlook, along with resilient economic data, have added to the pressure. The ISM Manufacturing PMI edged lower in September but still pointed to solid manufacturing activity, while the prices paid gauge soared. The jobs report due tomorrow will provide a fresh update on labor-market conditions and will help shape expectations for the Fed’s policy path. Traders have fully priced in a 25 bps rate hike by the Fed this year, although the probability of such a move in October has fallen to 34% from 70% last week.

US bonds resumed their sell-off on Thursday as investors continued to believe the Fed would need to raise rates further to address inflationary pressures and strong economic activity. The yield on the US 10-year Treasury note rose for a fourth consecutive session at the start of the final quarter, reaching 5.33%, its highest level since early 2002. Meanwhile, the 2-year Treasury yield, more sensitive to near-term Federal Reserve policy expectations, rose to 4.91%. The 30-year Treasury yield, more sensitive to longer-term inflation expectations and fiscal and geopolitical risks, climbed to around 5.67%, also its highest level since 2002. Traders have priced in another Fed rate hike this year amid persistent inflationary pressures from higher oil prices and the lack of a resolution to the Middle East conflict. Concerns over the US fiscal and debt outlook, alongside resilient economic data, are also adding pressure.

The US 10-year Treasury yield traded above 5.3% on Thursday, while the 30-year yield climbed to around 5.67%, with both reaching their highest levels since 2002 amid concerns that persistent energy-driven inflation could prompt tighter monetary policy. Deteriorating fiscal conditions, growing US government debt and weaker-than-expected bond buybacks have also weighed on the Treasury market in recent weeks. Oil prices remain elevated as the US and Iran make little progress in negotiations despite signs of recovering Middle East flows, raising inflationary risks. Meanwhile, data released Wednesday showed the US PCE price index rose 0.3% in August, below expectations for a 0.4% increase, while core PCE advanced 0.2%, also below forecasts of 0.3%. Markets now see roughly a 38% chance of a Federal Reserve rate hike in October, down from 51% before the PCE data. Investors also await the latest weekly jobless claims on Thursday and the September jobs report on Friday.