Sharp rise brings Treasury yields near spring tops

The sell-off pushed US Treasury yields to their highest levels in March, dispelling expectations that a long summer rally would fade in the face of stubborn inflation and a looming shift toward tighter monetary policies.

Yields, which rise when bond prices fall, have been on a steep upward trajectory since the September 21-22 Federal Reserve meeting. Friday, Disappointing September jobs report I briefly stopped climbing. But the 10-year bond yield ended the session at 1.604%, its highest close since June.

And while the rally was surprising, it was long overdue by those on Wall Street who spent the summer arguing that returns were lower than they should have been. Investors pay close attention to Treasury yields in part because they act as a benchmark for interest rates across the economy. It is also an important economic measure, reflecting expectations for the level of interest rates set by the Federal Reserve and dictated by growth and inflation expectations.

Some of the rally that pushed the 10-year bond yield down from its recent high of 1.749% in March appears to reflect the lower growth expectations. But much of the buying has shocked analysts as either tactical or opportunistic, and is set to end in the fall as trading activity picks up and the Fed is close to the first step in tightening policy: the act of scaling back its $120 billion monthly bond-buying program. .

Almost matching expectations, the Fed at its September meeting strongly indicated that It can start reducing its bond purchases As soon as November. Officials also indicated that they may raise short-term interest rates above their current level near zero as soon as next year.

In subsequent weeks, investors responded by selling all kinds of Treasurys, causing ripples across the markets, including gains in the dollar and a decline in tech stocks.

Short-term bond yields, which are particularly sensitive to expectations for interest rates set by the Federal Reserve, rose. But they also rose on long-term bonds, indicating that investors believe the Fed will be able to keep raising rates even after its initial move.

Analysts say other factors helped fuel the sell-off. The decline in new Covid-19 cases has renewed hope that more workers will return to their offices soon, boosting the economy. deal in Congress for US debt limit extended to December He removed an economic threat in the short term. Meanwhile, persistent supply shortages, rising energy prices and robust consumer spending have raised inflation expectations.

Larry Melstein, President of Government and Commercial Agencies at RW Pressprich & Co.

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Friday’s jobs data did little to change these accounts. Prior to the report, some analysts believed that the Fed might rethink its tapering schedule if the economy added fewer than 200,000 jobs in September. It turns out that the actual job gains were just below that threshold. But the upward revisions of the previous months still make traders confident that the Fed will stick to its plans.

Many investors and analysts believe that Treasury yields can continue to rise from here. Some have long predicted that the 10-year yield will end the year at 2%, sticking with those expectations even as it fell to 1.173% in August.

However, others cautioned that investors may underestimate future economic risks, including the possibility that rising energy costs and supply constraints will begin to weigh on growth.

“Look at the trends of the past two months, and the markets’ view of 2022 might make sense,” Jim Vogel, interest rate strategist at FHN Financial, wrote in a Friday note to clients. “Look at the next four months, and the prospects for a sustainable GDP recovery are already shrinking.”

Write to Sam Goldfarb at sam.goldfarb@wsj.com

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