Yields have surged as investors reprice the likelihood that the U.S. central bank will keep rates elevated and possibly raise them again if the economy continues to show resilience and price pressures remain above the Fed’s 2% target.
Concerns over rising Treasury supply and oil prices are also weighing on the market.
As yields jump, investors are also focused on the likelihood that high rates will ultimately cause a recession, with many analysts forecasting weakness in the fourth quarter and into 2024.
“I think that the real reason the long end has been in a free fall is mainly because of the yield curve steepening trade, where the curve has a tendency to reprice an economic slowdown,” said Tom di Galoma, managing director and co-head of global rates trading at BTIG in New York.
The closely watched yield curve between two-year and 10-year notes reached minus 30 basis points on Wednesday, after inverting as far as minus 111 basis points in March and July. It has been inverted since July 2022.
An inversion in this part of the curve is seen as forecasting an economic downturn, but typically the yield curve will move back into positive territory before a recession begins.Benchmark 10-year notes reached 4.884% and 30-year yields hit 5.011%, both the highest levels since 2007, before falling back to 4.754% and 4.877%, respectively.
Interest rate-sensitive two-year yields were last at 5.102%. They are holding below the 5.202% level hit on Sept. 21, which was the highest since July 2006.
Yields fell to session lows after the ADP National Employment Report showed U.S. private payrolls increased far less than expected in September, with 89,000 jobs gained during the month.
This week’s main economic focus will be Friday’s jobs report for September, which is expected to show that employers added 170,000 jobs.
Technical factors this week have also been seen as adding to the sell-off, with traders noting a lack of support levels between 4.5% and 5.0% on 10-year Treasury yields to draw buyers in.
Mortgage hedging as 30-year mortgage rates head closer to the 8% area and weakness in European government bonds is also adding to weakness in U.S. Treasuries, said di Galoma.
“There’s hedging, there’s yield curve steepening, you’re seeing rates in Europe continuing to climb… there’s a number of reasons why the long end is giving way,” he said.
The average U.S 30-year mortgage rate rose 12 basis points to 7.53% last week, the highest since Nov. 2000, the U.S. Mortgage Bankers Association said on Wednesday.
