(Bloomberg) — A $42 billion auction of 10-year US Treasuries resulted in the highest yield for the benchmark securities since 2007, luring decent appetite from investors who’ve been demanding more compensation to finance the US government.
The yield at Wednesday’s sale came in at 4.683%, the most since the global financial crisis, and just above the prevailing level seen in the market before the 1 p.m. bidding deadline in New York — a sign that demand only slightly lagged expectations. Most Treasuries ended the day little changed.
It sets the scene for a 30-year sale on Thursday that is expected to take place at the highest financing rate in a quarter of a century. Inflation running above the Federal Reserve’s target and swelling budget deficits has contributing to elevated long-dated yields.
“It’s still hard for yields to come down with outsize deficits, growth running solid, the war and inflation running above the Fed’s target,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities.
Earlier in the session, an in-line reading of the US consumer price index prompted traders to trim bets that Fed officials would raise interest rates at their next meeting in September. Swap markets implied a roughly 40% chance of a move versus around 50% before the data.
The two-year yield — most sensitive to near-term changes in Fed policy — were lower by less than two basis points at 4.2%. Still, investors continuing to fully price a hike by year-end, underlining their concerns around price pressures in the US economy.
“While the data should keep September rate hike expectations alive, it also provides little urgency for the Fed to act immediately,” said Steve Ryder, senior fixed income portfolio manager at Aviva Investors. “Policymakers are likely to place greater weight on the next CPI release and labor market report before making any decision on whether additional tightening is required later in the year.”
For July, the consumer price index, excluding often-volatile food and energy categories, increased 0.2% from a month earlier, according to Bureau of Labor Statistics data. On an annual basis, it advanced 2.5%, matching the slowest pace since March 2021.
Evidence of a weaker-than-expected labor market in July also sparked a rally in bonds late last week as traders dialed back expectations of a rate hike this year. Because the Fed isn’t scheduled to vote on interest rates again until September, attention now shifts to the next round of monthly inflation and employment reports for August.
“All Fed meetings in the near future will need to price in the possibility of a surprise, but we continue to think that the Fed will be able to narrowly avoid a hike,” said Christopher Hodge, chief US economist at Natixis North America. He cited a gradual drift down toward target inflation, a cooling consumer sector and a more precarious jobs outlook among the reasons.
An annual central bank symposium held in Jackson Hole, Wyoming, at the end of the month will also be watched for any potential hints surrounding the Fed’s policy deliberations.
Although Chairman Kevin Warsh has specifically held back on offering guidance to markets about the Fed’s policy path since he took the helm earlier this year, that gathering will be an opportunity for him to “fine-tune the inflation message,” said AmeriVet’s Faranello.
Brad Conger, chief investment officer at Hirtle & Co. said the firm has been adding exposure in 20-year bonds above 5% “based on our conviction that many forces are militating against broad inflation – most notably real wages which are flat.”
–With assistance from Elizabeth Stanton, Cameron Fozi and Ye Xie.
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