Bond Report: Treasury yields back to recent highs as 10-year briefly tops 4%

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U.S. bond yields rose on Tuesday as the Federal Reserve’s determination to fight inflation with even higher borrowing costs continued to weigh on Treasury prices.

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The cash Treasury market returned from its holiday weekend with benchmark yields hovering around cycle highs as fretting about high inflation and tighter Federal Reserve policy continued to pressure fixed income assets.

The benchmark 10-year Treasury yield TMUBMUSD10Y, 3.925% again briefly popped above 4%, challenging its highest level since 2008.

“Comments from Fed members [have] reiterated the determination to combat inflation, while accepting that the effect of the rate rises hitherto would not fully be seen for some months to come,” said Richard Hunter, head of markets at Interactive Investor.

Cleveland Fed President Loretta Mester is due to speak at the Economic Club of New York at 12 noon. The New York Fed 5-year inflation expectations survey for October will be published at 11 a.m. Eastern Time.

Traders were looking ahead to reports and data later in the week to be potential catalysts for the next moves. On Wednesday the U.S. producer prices data for September and the Fed’s previous rate-setting meeting minutes will be released. Thursday will see the U.S. September consumer prices data published.

“The next key test for yields as we believe we are nearing ‘peak hawkishness’ from the Fed soon, is more Thursday’s U.S. CPI data point than tomorrow’s FOMC minutes, which may contain few surprises, given nearly all Fed members are on the same page in supporting the current tightening regime,” said strategists at Saxo Bank in a morning note.

Markets are pricing in a 79% probability that the Fed will raise interest rates by another 75 basis points to a range of 3.75% to 4.00% after its meeting on November 2nd. The central bank is expected to take its Fed funds rate target to 4.68% by April 2023, according to the CME FedWatch tool.

Also pressuring bond prices of late has been turmoil in the U.K. gilt market, which experienced a spiral of selling after investors were spooked by the government’s plan for large debt-funded tax cuts.

The Bank of England on Tuesday again expanded its intervention into the market to protect pension funds from forced liquidations of bond portfolios. However, after initially falling sharply following the BoE’s initial buying, 30-year gilt yields TMBMKGB-30Y, 4.705% have moved back up to 4.71%, near their highest levels since the great financial crisis in 2007.

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