Long-term Treasury yields remained higher on the day, though the 30-year rate pulled back from 5% after a strong 20-year auction Wednesday afternoon, as investors focused on signs that the U.S. economy remains resilient.
What’s happening
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The yield on the 2-year Treasury
BX:TMUBMUSD02Y
was down slightly at 5.204% versus Tuesday’s level of 5.212%, the highest close since July 6, 2006. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
rose 3.8 basis points to 4.884% from Tuesday’s level of 4.846%, which was the highest 3 p.m. Eastern time level since July 25, 2007. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
rose 2.4 basis points to 4.975% from Tuesday’s level of 4.951%, which was the highest close since Aug. 22, 2007. Earlier on Wednesday, the rate had touched an intraday high of almost 5.032% during the New York session.
What’s driving markets
U.S. economic strength was in focus on Wednesday after data showed that housing starts rebounded 7% in September to an annual pace of 1.36 million units.
A day ago, a strong retail sales report also pointed to a U.S. economy that’s remaining resilient. Morgan Stanley economists revised their third-quarter GDP estimate to 4.9%, up from 4.5% previously. And the Atlanta Fed’s GDPNow estimate for third-quarter GDP was changed to 5.4%, up from a 5.1% estimate on Oct. 10.
In remarks made on Wednesday, Fed Gov. Christopher Waller said policy makers need to “wait, watch and see” how the economy evolves before making any interest-rate moves.
Markets are pricing in a 97.2% probability that the Fed will leave interest rates unchanged at a range of 5.25%-5.5% on Nov. 1, according to the CME FedWatch Tool. The chance of a 25-basis-point rate hike to a range of 5.5%-5.75% by December was seen at 40.8%.
Treasury’s $13 billion of 20-year bonds, held at 1 p.m. Eastern time on Wednesday, was “well received” as more indirect bidders stepped up to make purchases, according to Tom di Galoma, co-head of global rates trading for BTIG in New York.
Meanwhile, inflation concerns were reinforced by oil prices, which moved back toward highs seen in late September amid rising tensions in the Middle East. Oil surged on Wednesday as Iran reportedly called for an embargo on selling oil to Israel.
Also on Wednesday, the Bank of Japan announced another round of unscheduled bond purchases after the country’s 10-year bond yield hit a fresh decade-high of 0.815%, according to Bloomberg.
What analysts are saying
“Economic news out of the US continues to dumbfound expectations. September retail sales expanded by 0.7% month-on-month, comfortably above the 0.3% consensus and the sixth straight month of positive gains. Most economists, and indeed the Federal Reserve itself, had warned that a slowdown in consumer spending, and even a recession, was likely on the way towards the end of this year,” said Matthew Ryan, head of market strategy at global financial services firm Ebury in London.
“The main draw will, however, be an appearance from FOMC chair Jerome Powell in New York on Thursday, who will be speaking on the topic of the US economic outlook,” Ryan said. “At present, futures are back assigning more than a 50% chance of another FOMC hike by January.”
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