(Bloomberg) — The sell-off in the US bond market resumed Monday, sending 10-year yields to a 16-year high as an ever-resilient economy has investors scrambling for interest rates to continue rising even after the Federal Reserve winds down its hikes.
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These movements have pushed up yields on typical Treasurys as well as those that offer additional payments to cover inflation, suggesting that investors are bracing for the risk of continued monetary policy hike.
The yield on the 10-year Treasury inflation-protected note on Monday rose more than 2% for the first time since 2009, extending its climb from a year-to-date low near 1%. Soon after, the yield on the 10-year Treasury without that protection passed its October peak, rising 9 basis points to 4.35%, a level last seen in late 2007.
The jump extends the dramatic shift in the bond market over the past two weeks as the prospect of a recession recedes and the large federal budget deficit increases the supply of Treasury debt. This prompted investors to sharply raise interest rates on long-term debt, which have fallen deeply below short-term ones on fears that the economy is about to contract.
“The move upwards across the curve over the past few weeks has actually been on the real yield side,” said Zachary Griffiths, senior fixed income analyst at CreditSights, noting “a higher Fed policy rate or better growth outlook, with little to no shift in the outlook.” Inflation break-even.
The 10-year real yield — or inflation-adjusted — has risen sharply from around 1.5% in mid-July and above 1% earlier this year. On Monday, the 30-year real yield rose 6 basis points, to 2.15%. The treasury market volume was 75% of usual activity and was likely to exacerbate price action.
The movements raised expectations that the US bond market is closing the door in the post-financial crisis era of ultra-low rates, anticipating that the Federal Reserve will keep interest rates high for longer than markets expected. The move came even as swaps continued that the Federal Reserve has probably finished raising interest rates and will ease policy next year.
“The continued better-than-expected economic data has made it almost as if we’re thinking about a new reality that we haven’t enjoyed for some time, where rates are likely to be higher for longer,” Griffiths said. “This is the important thing that drives real revenue.”
Bond investors are preparing for upcoming auctions of 20-year notes and 30-year TIPS, which have smaller investor bases than other treasury products. The order will be watched closely for any hint that the current trajectory is coming to an end, or that there may be some other room to run.
Debt sales arrive ahead of the Federal Reserve’s annual meeting in Jackson Hole, with the market anticipating a hawkish tone from Chairman Jerome Powell when he speaks on Friday.
“Technical factors with bond bears,” said Andrew Brenner, head of international fixed income at NatAlliance Securities. But he added, “In a slow August, and illiquid holiday week, they have nothing to fear as the world expects Powell to be tough.”
— with assistance from Elizabeth Stanton.
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