Recent fluctuations in oil prices have led to a gradual increase in bond yields, reaching a 16-year high. This surge has triggered concerns about inflation, which has prompted the Federal Reserve to consider maintaining higher interest rates for an extended period. Let’s take a closer look at the details:
Yield Movement Overview
- The yield on the 2-year Treasury (BX:TMUBMUSD02Y) experienced a slight decrease of 2.5 basis points, resting at 5.117%. It is important to note that yields move inversely to prices.
- On the other hand, the yield on the 10-year Treasury (BX:TMUBMUSD10Y) increased by 1.7 basis points, reaching 4.632%, marking its highest level since 2007.
- Lastly, the yield on the 30-year Treasury (BX:TMUBMUSD30Y) climbed by 3.3 basis points, settling at 4.754%.
Impact of Oil Prices on Market Conditions
The rapid ascent of oil prices, currently hovering around a 13-month high, has intensified upward pressure on bond yields. Traders are increasingly concerned that resurgent inflationary tendencies may compel the Federal Reserve to prolong its maintenance of higher interest rates.
Key Economic Updates
During this period, investors should pay mind to several significant U.S. economic updates:
- The core Personal Consumption Expenditures (PCE) index, regarded as the Fed’s preferred inflation metric, will be released on Friday. Chair Jerome Powell will also deliver comments on Thursday at 4 p.m. Eastern time.
- Furthermore, Fed Governor Lisa Cook is scheduled to speak at 1 p.m., providing additional insights into current monetary policy.
- On Thursday, investors should also consider attending to the weekly jobless claims report and the revision of second-quarter GDP, both scheduled for 8:30 a.m.
- Additionally, pending home sales data for August will be published at 10 a.m., providing further context for the state of the U.S. housing market.
Concerns Surrounding Bond Yields
The significant rise in U.S. government bond yields over the past month has sparked uneasiness among fixed income investors. Notably, the 10-year yield has surged by 54 basis points in September alone. As a result, the ICE BofAML MOVE index, which measures expected Treasury volatility, has experienced a sharp 26% increase in the last two weeks after reaching multi-month lows.
These developments have created a volatile climate within the financial market, with investors closely monitoring the impact of rising bond yields and inflationary pressures on the overall economy.
Fed Policy Expectations
Investors are closely watching the Federal Reserve’s upcoming policy moves. According to the CME FedWatch tool, there is a 78% probability that the Fed will keep interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on November 1.
Looking ahead to December, the chances of a 25 basis point rate hike to a range of 5.50% to 5.75% are priced at 58%. However, it is not expected that the central bank will lower its Fed funds rate target back to around 5% until October 2024, as indicated by the 30-day Fed Funds futures.
In other news, the Treasury is set to auction $37 billion worth of 7-year notes on Thursday, providing an opportunity for investors.
When it comes to the market reaction, analysts are looking beyond immediate expectations. Alex Pelle, U.S. economist at Mizuho Securities, highlights the importance of the PCE report from the Bureau of Economic Analysis, which will be released on Friday. While Pelle expects the report to align with expectations, he emphasizes the need for vigilance regarding potential positive surprises in the future.
Pelle also points out that long-term rates currently have an asymmetric reaction function. On days with negative data surprises, rates remain steady, but on no-news days they rise. However, Pelle warns that a significant positive surprise could lead to a substantial increase in long-term rates. This situation arises as investors grapple with both the Fed’s soft-landing projections and the challenges posed by Treasury supply.
In conclusion, market participants are closely monitoring the Fed’s policy decisions and considering potential surprises that may affect interest rates. The upcoming Treasury auction also adds to the current market dynamics. Analysts highlight the need for attentiveness in order to navigate these uncertain times effectively.