Yields at these levels tighten financial conditions across mortgages, corporate debt and equity valuations, and analysts have said a sustained move above 5.2% would likely keep the US dollar supported while pressuring gold and risk assets. The S&P 500 has so far held within a few percent of its record high, so a further rise in real yields is a test of that resilience. Borrowing costs are already feeling it, with the average 30-year US mortgage rate at around 7.1%, its highest in more than two years. Oil has rebounded on Iran headlines, but the message from the bond market is that supply and Fed policy, not energy, are now the dominant drivers.
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Treasury yields are climbing on real yields and weak auction demand rather than inflation expectations, leaving the 10-year above 5.2% as markets price a likely October Fed hike.
Summary:
- The US 10-year Treasury yield rose above 5.2% on Monday, its highest since June 2007, while the 30-year yield has reached around 5.5%, its highest since 2004.
- A senior US economist at Aberdeen said the rise is driven by real yields rather than inflation expectations, noting the two-year breakeven has barely moved this week and remains well below earlier highs.
- The economist said markets are reacting to weak Treasury auction demand and signs of an accelerating US economy, which are raising expectations of tighter Fed policy.
- This week’s seven-year auction had its weakest bid-to-cover ratio in a year, indirect demand fell back, and T-bill auctions were also soft, suggesting growing reluctance to absorb supply.
- Pricing for an October Fed hike has reached around 70%, with close to 60% priced for back-to-back hikes in October and December.
- J.P. Morgan Asset Management’s Karen Ward expects the 10-year yield is unlikely to rise much above 5%, while ING has said yields could reach 6%.
The US 10-year Treasury yield has climbed above 5.2%, its highest level since June 2007, as weak auction demand and expectations of tighter Federal Reserve policy push up borrowing costs. The benchmark rose around 5 basis points on Monday and had jumped more than 10 basis points last Thursday, while the 30-year yield has reached around 5.5%, its highest since 2004.
A senior US economist at Aberdeen said the move is being driven by real yields, not inflation expectations. A rebound in oil prices likely did not help, the economist said, but the market gauge of inflation expectations known as the two-year breakeven has barely moved this week and remains well below the highs from earlier in the year. Instead, markets appear to be responding to weak Treasury auction demand and increased signs of an accelerating US economy, which are feeding expectations of a tighter Fed policy path.
The economist pointed to this week’s seven-year auction, which drew its weakest bid-to-cover ratio in a year, with indirect demand also falling back. Demand has also been soft in Treasury bill auctions, and the economist said there appears to be growing investor reluctance to absorb Treasury supply, especially as the likelihood of further Fed tightening increases. Pricing for a Fed hike in October has reached around 70%, and close to 60% for back-to-back hikes in October and December.
The Fed’s own messaging has leaned in the same direction. Governor Lisa Cook said on Monday that she expects AI investment and higher oil prices to keep pushing inflation up, and that any further rate hikes would depend on incoming data. The Fed has already begun raising rates this month.
Views on how much further yields can go are divided. J.P. Morgan Asset Management’s Karen Ward has predicted the 10-year yield is unlikely to rise much above 5%, according to the Seoul Economic Daily, while ING has said yields could climb to 6% in the near future. A Bloomberg survey of 173 market specialists found just over half expect the 30-year yield to exceed 6% this year. One market analyst noted that the 10-year is sitting just below technical resistance at 5.25%, an area dating back to July 2007, and a break above it could open the way to higher levels.
The pressure is not confined to the United States. Germany’s 10-year Bund yield has reached its highest since 2011, and UK gilt yields have also risen.
Attention now turns to upcoming US data, further Treasury auctions and any signals from Fed officials on whether an October hike is likely.
This article was written by Eamonn Sheridan at investinglive.com.