The selloff in Treasuries accelerated, driving yields to new multiyear highs, after an unexpected jump in job openings reinforced speculation that the Federal Reserve isn’t done raising interest rates.
(Bloomberg) — The selloff in Treasuries accelerated, driving yields to new multiyear highs, after an unexpected jump in job openings reinforced speculation that the Federal Reserve isn’t done raising interest rates.
The rout sent the 10-year note’s yield up as much as 11 basis points to 4.79%, extending its push to levels last seen in 2007. The rate on 30-year bonds rose 14 basis points to 4.93%, also the highest since 2007.
The sharp jump in yields over the past month is hammering investors with fresh losses, dashing hopes that the market would steady as the Fed neared the end of its most aggressive rate-hiking cycle in decades. It’s also dealing a fresh blow to stock valuations and threatening to add another brake to the economy as traders brace for rates to remain high through next year.
“The speed of the move has scared all the value buyers,” said Michael Cloherty, head of US rates strategy at UBS Securities LLC. “If you can hold a trade for three months, you’re happy. It’s what happens in the next 72 hours that’s the trouble here.”
The session highs were reached after a report showed that US job openings unexpectedly increased in August, highlighting how durable demand for labor has remained despite the Fed’s monetary policy tightening since March 2022. With the economy defying downbeat forecasts, swap contracts are putting 40% odds on another quarter-point rate increase at the Fed’s next meeting in November and about 60% odds of a move by year-end.
While the job openings data for August will soon be overtaken by the broader employment data for September that will be released Friday, “investors are nonetheless interpreting this as yet further confirmation that the US economy can withstand higher real borrowing costs,” Ian Lyngen, interest-rate strategist at BMO Capital Markets, said in a note.
Before the JOLTS data, yields were already moving higher with no clear catalyst beyond general expectations that the Fed may raise rates again — a prospect endorsed by Loretta Mester, president of the central bank’s Cleveland branch in comments Tuesday. Atlanta Fed President Raphael Bostic underscored the hawkish tone, saying the Federal Reserve should hold interest rates at elevated levels “for a long time.”
The upward drift in yields has included those on inflation-adjusted securities, indicating investors are demanding higher risk-free rates of return based on their expectations for how the economy is likely to perform.
The 10-year real yield — or the rate after inflation is taken into account — rose to 2.44% Tuesday, extending a climb from below 2% over the past month. The 30-year real yield increased nearly 14 basis points to 2.52%.
“Real yields on the long end just have further to go — the pace of inflation falling is not satisfactory enough for the market, and the Fed’s framework for getting inflation lower is to slow the economy, and that’s not exactly happening to the market’s satisfaction,” said John Brady, managing director at RJ O’Brien.
In addition to pricing in higher odds of a Fed rate increase this year, traders also have been paring wagers on rate cuts next year.
Forward markets anticipate the Fed’s policy rate will remain above 4% “forever,” UBS’s Cloherty said. Those are “never-going-to-land type levels,” where previously a soft landing for the economy was anticipated.
The scale of the selloff is broadly indicative of investors scrapping bullish bets, JPMorgan Chase & Co. strategist Jay Barry said in a note late yesterday.
“We have been concerned that the position and hedging technicals could be an ongoing negative for Treasuries,” Barry wrote.
–With assistance from Rachel Evans.
(Adds comments, updates yield levels.)
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