Bond Yields Rise as Kashkari Eyes December Rate Cut

On Monday, yields on U.S. government bonds rose for the first time in five sessions, driven by a growing sentiment that the U.S. economy might be stronger than previously thought.

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Market Movements

The 2-year Treasury yield increased to 4.743%, a rise of 6 basis points from Friday's 4.683%. The 10-year Treasury yield climbed to 4.281%, up 6.9 basis points from 4.212%, and the 30-year Treasury yield reached 4.419%, also rising 6.9 basis points from 4.350%. Treasury yields move inversely to their prices. Notably, Friday’s yield for the 2-year Treasury was the lowest since April 4, according to Dow Jones Market Data, with 10- and 30-year yields at their lowest since March 28.

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Factors Influencing the Market

On Monday, the New York Fed’s Empire State business-conditions index, which measures manufacturing activity in New York, indicated contraction for the seventh consecutive month, registering at minus-6. This was slightly better than economists' median forecast of minus-10.5.

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Despite this data, a perspective emerged that U.S. economic growth could be more robust than previously anticipated. Will Compernolle, a macro strategist at FHN Financial, suggested that the bond market might be underestimating future growth prospects and the longer-run neutral policy rate.

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He pointed out that, aside from the upcoming retail sales report, there is a lack of major economic data until next week’s Personal Consumption Expenditures (PCE) report. This could lead to aimless drifting in Treasury yields. Compernolle projected a higher risk for yields to rise, estimating that if 10-year yields surpass 4.10% in the next couple of weeks, they could quickly increase to between 4.20% and 4.45%.

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Federal Reserve Activity

Federal Reserve officials scheduled to speak on Monday included Philadelphia Fed President Patrick Harker, who planned to discuss the economic outlook, and Fed Governor Lisa Cook. Minneapolis Fed President Neel Kashkari, in an appearance on CBS’s “Face the Nation” on Sunday, indicated it was reasonable to expect that the Fed might hold off on cutting interest rates until December.

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Political Developments in France

In France, Marine Le Pen, a far-right political leader, expressed her willingness to cooperate with President Emmanuel Macron. This announcement helped to reduce some political uncertainty and provided a calming effect on the country’s stock and bond markets.

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In summary, Monday saw a significant rise in U.S. government bond yields, ending a five-session decline, fueled by optimism about the U.S. economy's potential strength. The market's focus was partly influenced by regional economic indicators and the upcoming schedule of Federal Reserve officials' speeches, amidst a backdrop of stabilizing political news from Europe.

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