The US bond market’s renewed selloff is propelling 10-year yields to levels last observed 16 years ago. This trend coincides with investors preparing for the possibility of sustained elevated US bond interest rates, even as the Federal Reserve wraps up its series of rate hikes. Notably, both conventional Treasuries and inflation-adjusted options have seen considerable yield surges, indicating a noteworthy shift in market dynamics.
As of Monday’s trading session, the 10-year real yield, which factors in the impact of inflation, has witnessed a notable surge from its mid-July position of approximately 1.5%. Furthermore, this trajectory marks a substantial increase from just slightly above 1% earlier in the current year. Over the course of Monday’s activities, the 30-year real yield surged by a noteworthy 6 basis points, reaching an impressive 2.15%.
However, it’s worth noting that trading volume within the Treasury market was measured at 75% of its typical activity level. This unique situation could potentially have contributed to the amplified price movements observed.
Market experts and financial analysts are focusing intently on Federal Reserve Chair Jerome Powell’s upcoming address, scheduled for this Friday at the central bank’s annual symposium in Jackson Hole, Wyoming. Expectations are running high for Powell to adopt a hawkish stance, setting the tone for future monetary policy decisions.
Andrew Brenner, Head of International Fixed Income at NatAlliance Securities, pointed out, “The technical indicators align with the bond bears.” However, Brenner also acknowledged that given the current environment of a slow August trading period and relatively illiquid holiday week, the prevalent market sentiment is that Powell will indeed strike a hawkish chord.
Market observers are now directing their attention towards the imminent auctions of 20-year bonds and 30-year Treasury Inflation-Protected Securities (TIPS) to gain insights into whether the ongoing selloff is inching towards a potential turning point or if further market upheaval is on the horizon.
This market phenomenon reflects the remarkable resilience of the US economy, which has prompted investors to prepare for an extended period of elevated interest rates, even after the Federal Reserve concludes its tightening cycle. Yields have surged across various Treasury categories, including those tailored to hedge against inflation. The steady ascent of the 10-year real yield from its mid-July levels signifies a possible departure from the era of ultralow rates that characterized the post-financial crisis period.
Interestingly, this surge in yields diverges from the swaps market’s prevailing prediction. It suggests that the Federal Reserve has likely concluded its series of rate hikes and may be moving towards policy easing in the forthcoming year. This juxtaposition highlights the complexity of the current market sentiment.
Analysts continue to closely monitor the content of Federal Reserve Chair Powell’s impending address for any clues regarding the central bank’s future monetary policy trajectory. Additionally, the auctions of 20-year bonds and 30-year TIPS hold significant weight as they could provide valuable insights into whether the ongoing selloff is approaching an eventual end or if further fluctuations are imminent.
Zachary Griffiths, Senior Fixed-Income Strategist at CreditSights, highlighted that the recent surge in yields primarily stems from elevated expectations of Federal Reserve policy rate increases and improved growth projections. This spike in yields has been accompanied by only a marginal increase in breakeven inflation expectations.
Griffiths observed, “The sustained better-than-anticipated economic data has us contemplating a new reality that we haven’t experienced for quite some time, where rates could potentially remain significantly higher for an extended period.”
As the US bond market experiences a notable shift, investors are preparing for a protracted period of higher interest rates. With the Federal Reserve’s rate hikes reaching their conclusion, Powell’s upcoming speech at Jackson Hole assumes heightened importance, as do the forthcoming bond auctions that could offer insights into the trajectory of the ongoing selloff.
Source: Bloomberg
