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Bond Report: 2-year Treasury yield surges to 15-year high after U.K. gilts tank, weak auction

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Treasury yields surged Monday, with the 2-year rate jumping to a 15-year high after a surge in U.K. gilt rates and a poorly received U.S. auction.

What’s happening
  • The yield on the 2-year Treasury note
    TMUBMUSD02Y,
    4.338%

    jumped 10.3 basis points to 4.315%, its highest 3 p.m. ET level since Aug. 14, 2007, according to Dow Jones Market Data. Yields move in the opposite direction to prices.
  • The yield on the 10-year Treasury note
    TMUBMUSD10Y,
    3.919%

    18.3 basis points to 3.878%, its highest since April 9, 2010.
  • The yield on the 30-year Treasury bond
    TMUBMUSD30Y,
    3.740%

    was up 8.6 basis points at 3.697%, its highest since April 11, 2014.
What’s driving markets

Global bond yields continued to move higher as the prospect of tighter monetary policy to combat inflation, along with fears in the U.K. about increased issuance to fund fiscal splurges, damped investor appetite for fixed-income assets.

A sale of $43 billion in 2-year notes met tepid demand, with some buyers able to pick up paper at a yield 1.4 basis points above the market price. The so-called tail was the largest since Feb. 2020. Bids exceeded supply by a ratio of 2.51 to one, larger than in last month’s sale but still below average, according to Thomas Simons, money-market economist at Jefferies.

Markets are pricing in a 72.5% probability that the Federal Reserve will raise interest rates by another 75 basis points to a range of 3.75% to 4% on Nov. 2 as it tries to combat inflation running near 40-year highs.

The central bank started the year with borrowing costs near zero and is mostly expected to take its fed-funds rate target to at least between 4.5% and 4.75% by next March, according to the CME FedWatch tool.

Two-year U.K. gilt yields
TMBMKGB-02Y,
4.527%

have surged more than 140 basis points in just the last two sessions after new Chancellor of the Exchequer Kwasi Kwarteng delivered a tax-cutting budget that would be funded by an extra £62 billion of bond sales.

Traders are now increasing bets that the move will prove inflationary — particularly as a slumping pound raises import costs — and will cause the Bank of England to hike interest rates by more than previously thought: possibly taking them as high as 5.25% according to Bank of America.

Yields extended the rise after the Bank of England said it was monitoring financial markets but took no action.

Back in the U.S., the Chicago Fed national activity index fell to zero in August from a revised 0.29 in July. On Monday afternoon, the Treasury will auction $43 billion of 2-year notes. Investors will also hear from four Federal Reserve regional bank presidents throughout the day.

What analysts are saying

This year “has been defined by global inflation pressures and the measures being taken by authorities to counteract that inflation pressure. For months, that story has been dominated by the Fed, with the rest of the world struggling to keep up,” said rates strategists at Nat West Markets.

“But one has to wonder if these past few days mark a bit of a turning point away from the specifics of the Fed as the dominant market driver and towards the global response to the Fed’s torrent pace of easing,” they said, with particular focus currently on the U.K.

—Jamie Chisholm contributed to this article.

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