Treasury Yields Show Mixed Movement

Treasury yields experienced mild fluctuations as bond market volatility eased, setting the stage for crucial jobs data at the end of the week.

Key Observations:

  • The yield on the 2-year Treasury (BX:TMUBMUSD02Y) dropped by 2.9 basis points to 5.042%. This means that prices moved in the opposite direction.
  • There was almost no change in the yield on the 10-year Treasury (BX:TMUBMUSD10Y), which remained at 4.734%.
  • In contrast, the yield on the 30-year Treasury (BX:TMUBMUSD30Y) rose by 1.8 basis points to 4.879%.

The bond market remained relatively stable as a softer-than-expected ADP survey of the U.S. private sector jobs market was released on Wednesday. Additionally, ongoing declines in oil prices contributed to minimal shifts in benchmark 10-year borrowing costs, which stood at 4.73%. This is a decline of 13 basis points from the midweek high that was reached, marking a fresh 16-year record.

Influence of Labor Market Data

The direction of future bond movements will likely depend on the outcome of upcoming labor market data. Specifically, market participants will pay close attention to the weekly initial jobless claims report on Thursday and the nonfarm payrolls report on Friday. These numbers will be compared to the positive JOLTS report from Tuesday and the softer ADP data.

Federal Reserve Commentary

On Thursday, several Federal Reserve officials will be speaking. This includes Cleveland Fed President Loretta Mester, who will address the Chicago Payments Symposium at 9 a.m., as well as San Francisco Fed President Mary Daly, who will make comments at noon in New York.

Market Expectations for Fed Interest Rates

According to the CME FedWatch tool, the market is currently indicating an 80% probability that the Federal Reserve (Fed) will not make any changes to interest rates, which currently stand at a range of 5.25% to 5.50%, at its next meeting on November 1.

For the subsequent meeting in December, there is a 33% chance that the Fed will raise interest rates by 25 basis points, bringing them to a range of 5.50% to 5.75%.

A longer-term outlook suggests that the central bank is not anticipated to lower its target rate for Fed funds back to around 5% until September 2024, as indicated by the 30-day Fed Funds futures.

Analyst Insights

Greg McBride, the chief financial analyst at Bankrate, has raised concerns about the impact of recent rate hikes on the housing market. He points out that both long-term Treasury yields and mortgage rates have been rapidly increasing in recent weeks. In fact, Bankrate’s weekly national survey shows that the average 30-year fixed rate mortgage has surged to a new 23-year high of 7.80%.

McBride emphasizes that these rising mortgage rates are exacerbating the already challenging affordability issues faced by potential home buyers. He attributes the increase in long-term bond yields and mortgage rates to an imbalance between the expanding supply of government bonds and the reduced demand resulting from the Federal Reserve and many banks discontinuing their purchases of these securities.

The analyst concludes by acknowledging that it is uncertain how long this trend will persist and continue driving up bond yields and mortgage rates.

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