Treasury yields rose across the board, pushing two-year yields to the highest since 2007 and tightening financial conditions across Wall Street as traders brace for the possibility of a strong jobs report that would usher in another large rate hike from the Federal Reserve.
(Bloomberg) — Treasury yields rose across the board, pushing two-year yields to the highest since 2007 and tightening financial conditions across Wall Street as traders brace for the possibility of a strong jobs report that would usher in another large rate hike from the Federal Reserve.
Selling pressure in the broader Treasury market was led by long-dated yields and yields rose to fresh session highs after ISM manufacturing index was unchanged in August, ahead of a forecast decline. The ISM employment sub index expanded, after economists had forecast a contraction in line with July.
The two-year yield increased as much as 5.6 basis points to 3.55%, the highest since 2007. The 10-year yield rose 10 basis points to 3.29%, while the 30-year rate jumped 11.6 basis points to 3.41%, within sight of its June high of nearly 3.5%. Treasury yields held the bulk of their session moves late in New York.
“There is little question that financial markets have reverted to a ‘good is bad’ trading dynamic in which constructive economic data will only embolden the Fed to move 75 bp and a more restrictive stance will contain inflation expectations and undermine risk assets,” said Ian Lyngen, a rates strategist at BMO Capital Markets.
Swaps for the September Fed meeting priced in 68 basis points of tightening or odds of 72% of a three-quarter rate hike this month. The peak policy rate via the March 2023 Fed meeting OIS swap rose to 3.96% and is up from 3.23% over the past month.
It all comes after the jobs report released last month showed that payroll growth was more than twice what economists expected, triggering a selloff in fixed-income markets. Friday’s report is the latest monthly gauge of the labor market before the Sept. 21 Fed policy decision, so it may play a key role in whether they decide to enact the third straight three-quarter point rate hike or opt for a smaller move.
At the same time, investors are anticipating that tighter monetary policy will slow the rise in consumer prices, extending the pullback from inflation-protected Treasuries. Sentiment toward owning TIPS has soured due to declining oil and gasoline prices and a view among investors that a hawkish Fed that will push policy rates higher and keep them elevated.
That pushed the yield on five-year TIPS up around 11 basis points above 0.86%, the highest level since January 2019. Its yield was negative as recently as Aug. 2 and the benchmark surged nearly 20 basis points on Wednesday as month-end selling slammed the securities.
Contributing to the current negative sentiment for inflation bonds is that TIPS pay interest based on the not-seasonally-adjusted version of the CPI with a two-month lag. That means a 1.4% drop in that gauge in July starts to erode inflation accruals in September.
The inflation bond selloff extended further out the curve, with the 10-year real yield up some 10 basis points at 0.81% and within sight of its mid-June peak of 0.877%.
(Updates yields throughout.)
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