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Bond Report: Ten-year Treasury yield breaches 1.45% to hit highest level since July amid parade of Fed speakers

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The 10-year Treasury yield breached 1.45% on Friday to hit its highest level in almost three months as investors continued to react to the Federal Reserve’s policy from two days ago.

Of particular interest to bond investors was the central bank’s signal that the tapering of $120 billion of monthly bond purchases “may soon be warranted.” A parade of Fed policy makers, headlined by Fed Chairman Jerome Powell, on Friday may provide market participants with more information.

What Treasury yields are doing
  • The 10-year Treasury note
    TMUBMUSD10Y,
    1.448%

    yields 1.45%, versus 1.408% at 3 p.m. Eastern Time on Thursday. It’s the highest intraday level since July 1.
  • The 30-year Treasury bond rate
    TMUBMUSD30Y,
    1.970%

    was at 1.964%, up from 1.923% a day ago.
  • The 2-year Treasury note
    TMUBMUSD02Y,
    0.267%

    was yielding 0.263%, compared with 0.259% on Thursday.
What’s driving the market?

Yields rose on Friday as bond traders continued to digest the likelihood that the Federal Reserve will be starting to pull back on its quantitative easing program.

In the first of a parade of Fed speakers on Friday, Cleveland Fed President Loretta Mester said she wants the Fed to start tapering in November and end sometime before next June. She also said she sees the first rate hike coming by the end of next year.

Federal Reserve Chairman Jerome Powell, the Fed’s No. 2 policy maker Richard Clarida, and Fed Governor Michelle Bowman were also set to make appearances on Friday. Kansas City Fed President Esther George and Atlanta Fed President Raphael Bostic are the other officials slated to speak today.

The string of speakers comes after the Fed on Wednesday set the stage for an announcement of tapering at the next central bank meeting in November, which could see reductions of the monthly purchases of $80 billion in Treasurys and $40 billion in mortgage-backed securities kick off by December, especially if the labor market maintains its trajectory of improvement from the COVID-19 pandemic.

Yields have been climbing since Wednesday as would be expected on confirmation that the Fed will be reducing purchases of Treasurys. The move up in yields has been restrained though by the view that the Fed will continue to make substantial purchases in debt and won’t move as quickly in raising interest rates, which currently stand at a 0% to 0.25% range.

A projection of interest rate increases by Fed members on Wednesday, known as the dot plot, pointed to a sooner-than-expected rate increase for 2022, but Powell said in a Q&A that the so-called dot-plot of interest rates shouldn’t be used as a predictive tool of where rates will end up.  

In data releases on Friday, sales of new homes in the U.S. rose in August, as the market for newly-constructed buildings continued to show signs of stabilization after months of declines. U.S. new-home sales increased 1.5% to an annual rate of 740,000, the government said Friday. The median forecast of economists polled by MarketWatch was for an annual rate of 720,000 for August.

What analysts are saying

“There is little question that US rates are shifting into ‘a tale of two bond markets’—although the greatest unknown has become the extent to which upward pressure on the presumed forward path of policy rates will drag 10s and 30s to a higher yield plateau or simply reinforce the range trading thesis as a less easy Fed offsets term-premium and compresses volatility further out the curve,” wrote BMO Capital Markets strategists Ian Lyngen and Benjamin Jeffery, in a daily research note.

“We’re erring on the side of the latter, however that will not prevent 10-year yields from attempting to retest the 1.55-1.60% range during Q4,” the analysts wrote.

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