Bond yields rose early Monday, as some traders took profits after prices surged last week on hopes the Federal Reserve was done raising interest rates.
What’s happening
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The yield on the 2-year Treasury
BX:TMUBMUSD02Y
rose less than 1 basis points to 4.878%. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
climbed 7.7 basis points to 4.595%. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
added 8 basis points to 4.780%.
What’s driving markets
Government bonds are giving back a portion of last week’s rally, which saw 10-year Treasury yields at one point dip below 4.5% having been above 5% late last month.
With little in the way of fresh catalysts on Monday, traders have further time to ponder the cause of the recent retracement in yields.
“The move appears to confirm our view that bonds were oversold and yields were close to the upper end of their new range,” said the rates analyst team at Goldman Sachs, led by Praveen Korapaty.
There were three main factors causing the yield reversal, Goldman said. First, the Treasury last week said it would sell relatively fewer longer term bonds than the market expected.
“We have been of the view for a while now that investors were overestimating the effects of supply on market-clearing yield levels, and the dominance of price-sensitive marginal investors meant more volatility in longer term bond yields with swings in the macro outlook rather than simply higher yields,” said Goldman in a note published late Friday.
Next, following last month’s strong economic momentum, data have finally begun to show signs of cooling—both ISM reports and the labor market report surprised to the downside, said Goldman.
And finally, Goldman believes that some investors were overly short the longer end of the bond market. “One reason we suspect this to be the case is that the magnitude of market moves both on the way up, and now on the way down, are exaggerated relative to the size of information surprises,” said the Goldman team.
The Federal Reserve’s senior loan officer survey for October, due for release at 2 p.m.. Eastern. Federal Reserve Governor Lisa Cook is expected to speak at Duke University at 11 a.m.
Markets are pricing in a 90% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on Dec. 13, according to the CME FedWatch tool.
The chances of a 25 basis point rate hike to a range of 5.50 to 5.75% at the subsequent meeting at the end of January is priced at 16%.
The central bank is not expected to take its Fed funds rate target back down to around 5% until July 2024, according to 30-day Fed Funds futures. Just a month or so ago, that rate was not expected to be reached until October.
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