Ten-year yields hit 12 week high on strong US economy
Updated at 15:00 EDT
By Karen Brettell
NEW YORK, Oct 21 (Reuters) -Benchmark 10-year Treasury yields rose to a 12-week high on Monday as investors priced for a more robust American economy and less dovish Federal Reserve.
Yields have jumped since a much stronger than expected employment report for September led investors to price out the probability that the U.S. central bank will make further large interest rate cuts, following a 50 basis point reduction last month.
“Before that employment report, the bond market was thinking more likelihood of recession, more likelihood of aggressive Fed easing,” said Will Compernolle, a macro strategist at FHN Financial in New York.
Traders are now pricing in 41 basis points of cuts by year-end, indicating a less than certain chance that the Fed will make 25 basis point cuts at each of its coming two meetings. FEDWATCH
Dallas Fed President Lorie Logan said on Monday she sees more rate cuts ahead for the central bank and suggested she sees no reasons why the Fed can’t also press forward with shrinking its balance sheet.
Minneapolis Fed President Neel Kashkari on Monday repeated he expects "modest" interest-rate cuts over the coming quarters, though a sharp weakening of labor markets could move him to advocate for faster rate cuts.
Investors are also focused on geopolitical tensions in the Middle East and the Nov. 5 U.S. presidential election, which Compernolle notes “will cause a lot of volatility.”
Benchmark 10-year note yields US10YT=RR rose 10.5 basis points to 4.18%, the highest since July 30. They crossed above their 200-day moving average at 4.17% for the first time since July 5.
Two-year note yields US2YT=RR rose 7 basis points to 4.025%.
The yield curve between two-year and 10-year notes US2US10=TWEB steepened to 15.1 basis points.
Analysts at JPMorgan see further upside in long-end yields while the yield curve continues to steepen.
"Despite the recent move to higher yields, bear steepening episodes suggest the long end could cheapen further, we don’t see near-term catalysts to reprice Fed policy expectations dovishly, and political developments are likely to dominate price action as we approach November," analysts, including Jay Barry said in a report.
The U.S. budget deficit is expected to worsen under a presidency by either Donald Trump or Kamala Harris though fiscal details will also largely depend on whether either party secures a majority in Congress.
The Treasury Department will sell $13 billion in 20-year bonds on Wednesday and $24 billion in five-year Treasury Inflation-Protected Securities on Thursday.
Target rate probabilities for Fed's upcoming meetings https://reut.rs/4eLBih0
Reporting by Karen Brettell; editing by Jonathan Oatis and Aurora Ellis
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