The US government bond market had its worst day since March 2020 by one measure, as hotter-than-expected September inflation data and weak demand for a bond auction fueled a surge in 30-year yields.
(Bloomberg) — The US government bond market had its worst day since March 2020 by one measure, as hotter-than-expected September inflation data and weak demand for a bond auction fueled a surge in 30-year yields.
The 30-year Treasury yield rose as much as 19 basis points and was 16 basis points higher on the day in late trading, its biggest increase since the market turmoil unleashed by the onset of the pandemic. While at 4.86% it’s still nearly 20 basis points below multiyear highs reached last week, the surge stoked fears of new milestones, including a yield of 5% for 10-year yields.
Yields across the Treasury spectrum were at least 9 basis points higher on the day in late trading, the 10-year by 14 basis points to 4.70%. The reception for the 30-year auction followed similarly poor results for sales of three- and 10-year notes earlier in the week. The combination heightened concerns about the interest rates investors are likely to demand as auction sizes grow and a strong economy encourages risk-taking.
The 30-year auction “appears to have further destabilized sentiment,” TD Securities strategists Gennadiy Goldberg and Molly McGown said in a note. “Worries about a lack of demand for Treasuries could allow rates to re-test recent highs, with 10s potentially making a run at the 5% mark,” last seen in 2007.
The strategists Wednesday revised their forecasts for Federal Reserve policy and Treasury yields, predicting a later start to a smaller total number of rate cuts, and higher yields than previously expected, based on “the resilience of the US economy.”
Thursday’s rout began after Labor Department data showed consumer prices rose 0.4% in September, keeping the year-on-year rate at 3.7%. Economists’ median estimate was for a 0.3% increase and a 3.6% rate.
The inflation data prompted traders to price in higher odds of another Fed interest-rate increase this year. Swap contracts linked to future Fed rate decisions pushed the odds of another quarter-point increase back to about 40%, from closer to 30% on Wednesday.
“I think we have moved back into a twilight zone regarding the end of the Fed cycle,” said Mustafa Chowdhury, chief rates strategist at Macro Hive Ltd. Inflation is unlikely to decline as smoothly as Fed policy makers have forecast, and “sooner or later they will have to restart hiking.”
Rates on swaps that settle based on the Fed’s policy rate increased, pricing in about 11 basis points of tightening for December, or about 40% of a quarter-point hike. For most contracts expiring in 2024, rates increased by 7 to 10 basis points, signifying lower odds of rate cuts.
Inflation-protected Treasuries outperformed as investors factored in the prospect that the rate of consumer price growth will continue to outpace expectations. The resulting wider gaps between lower real and higher nominal Treasury yields represent the consumer price inflation rates needed to equalize their returns.
For five-year securities, the breakeven inflation rate increased by about 4 basis points to 2.24%. It remains near the low end of its range since early 2021, before price growth began accelerating. That’s a sign investors expect the Fed to be successful in curbing inflation.
The auction was awarded at 4.837%, nearly 4 basis points higher than its yield in pre-auction trading at the bidding deadline. That signifies demand fell short of dealers’ expectations, even as it was the highest-yielding 30-year auction since 2007.
“I don’t think right now is the time to play hero and add ton of duration,” according to Michael Contopoulos, head of fixed income at Richard Bernstein Advisors. With the Fed slowing the pace of tightening, “the economy and inflation are being given a chance to bubble up, and that’s bad for longer term yields.”
–With assistance from Elizabeth Stanton.
(Updates yield levels.)
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