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Bond yields rose on Monday after a U.S. government showdown that could have damaged the economy was averted.
What’s happening
-
The yield on the 2-year Treasury
BX:TMUBMUSD02Y
added 5.4 basis points to 5.108%. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
rose 4.6 basis points to 4.625%. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
gained 3.6 basis points to 4.739%.
What’s driving markets
Traders had gone into the weekend expecting a U.S. government shutdown that by some analysts estimates could have knocked 0.1 percentage points per week of U.S. GDP growth.
That may have dampened inflationary pressures and perhaps made it less likely the Federal Reserve would raise interest rates again this cycle.
In the event a temporary budget deal was agreed, averting a government closure for now, and the news helped push benchmark 10-year treasury yields back towards recent 16-year peaks.
Markets are pricing in a 71% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on November 1, according to the CME FedWatch tool.
The chances of a 25 basis point rate hike to a range of 5.50 to 5.75% at the subsequent meeting in December is priced at 38%.
The central bank is not expected to take its Fed funds rate target back down to around 5% until October 2024, according to 30-day Fed Funds futures.
U.S. economic updates set for release on Monday include the S&P final manufacturing PMI for September, due at 9:45 a.m. Eastern, followed at 10 a.m. by the September ISM manufacturing survey, and August construction spending.
Fed Chairman Jerome Powell and Philadelphia Fed President Patrick Harker are expected to make comments at a community event in York, Pa at 11 a.m.. New York Fed President John Williams is due to speak at an environmental economics conference at 11:30 a.m., and President of the Cleveland Fed Loretta Mester is slated to talk at 19:30 at the 50 Club of Cleveland.
Japan’s 10-year government bond yield
BX:TMBMKJP-10Y
dipped from session highs after the Bank of Japan made an additional purchase of 5 to-10-year bonds to suppress yields. The benchmark Japanese bond yield has climbed to their highest since 2013 as inflation sustains its run of being above the central bank’s 2% target.
What are analysts saying
“U.S. Treasuries might be supported by a lack of coupon supply this week. However, a missed government shutdown, job data, and a lack of demand from quarterly-end portfolio rebalancing leave the door open for another selloff,” said analysts at Saxo Bank in a morning bulletin.
“Last week, U.S. Treasuries continued to tumble despite a benign PCE print, seeing core inflation falling below 4% for the first time in two years. We therefore believe that rising yields show that markets are discounting a higher permanent terminal rate. Despite a correction that might be due following last week’s rise in yields, we still expect 10-year yields to rise to 5% as selling pressure mounts,” the Saxo team added.
