The Benchmark Treasury Yield Dips but Remains Above 4%

On Tuesday, U.S. Treasury yields continued to rise, with the 10-year yield surpassing the 4% mark for the second consecutive day. This upward movement reflected ongoing market sentiment that the U.S. economy remains strong and that the Federal Reserve may opt not to adjust interest rates in its upcoming meeting.

‍

Market Overview

‍The 2-year Treasury yield saw little change, standing at 3.993%, barely shifting from Monday’s 4.001%. Meanwhile, the 10-year Treasury yield increased by 2.7 basis points, reaching 4.052% from the previous day’s 4.025%. Notably, Monday’s close above 4% marked the first time the yield crossed this threshold since the end of July. The 30-year Treasury yield also edged higher, advancing 3.1 basis points to 4.335%, up from 4.304% on Monday.

‍

Key Drivers

‍The primary factor behind the continued rise in the 10-year yield is optimism surrounding the resilience of the U.S. economy. Friday's unexpectedly strong jobs report boosted confidence that economic conditions are holding firm. At the same time, concerns about inflation have also reemerged, driven by a recent surge in oil prices. While oil prices paused their ascent on Tuesday, their earlier rise raised worries that inflationary pressures could return, as noted by Jim Reid, a strategist at Deutsche Bank.

‍

Reid pointed out that rising oil prices, combined with robust U.S. economic data, have heightened investors' perception of inflation risks. This sentiment was reflected in the U.S. 2-year inflation swap rate, which climbed to 2.39%, the highest in almost three months. A month ago, that rate had dipped below 2%. The increased awareness of inflation risk spurred a selloff in bonds on Monday as investors adjusted their expectations for rapid rate cuts by central banks.

‍

As of Tuesday, futures markets indicated an 86.7% chance that the Federal Reserve would cut interest rates by 25 basis points on November 7, which would bring the current rate range of 4.75% to 5% down slightly. However, there remained a 13.3% probability that the Fed would hold rates steady. This marks a significant shift from just a week ago, when traders assigned a 36.8% probability to a 50-basis-point cut in November, a scenario now considered highly unlikely.

‍

Additional economic data released on Tuesday showed that the U.S. trade deficit narrowed by 11% in August, reaching a five-month low. This reduction was largely attributed to a drop in imports, particularly of oil and new automobiles. In a separate development, John Williams, the president of the New York Federal Reserve, commented during an interview with the Financial Times that two quarter-point rate cuts by the end of the year represent a "very good base case."

‍

Later in the day, the U.S. Treasury planned to announce the results of a $58 billion auction of 3-year notes, providing further insights into market demand for government debt amid rising yields.

‍

Outside the U.S., a "risk-off" sentiment took hold in European and Asian markets, as traders were disappointed by Beijing's lack of new stimulus measures. This development added to global market uncertainty, especially as investors weigh the outlook for interest rates, inflation, and economic growth in major economies.

‍

In summary, U.S. Treasury yields are on the rise, driven by expectations of continued economic strength and renewed inflation concerns. The market is carefully watching the Federal Reserve's next moves, while data on trade and Fed official comments suggest a base case for gradual rate cuts by year-end. At the same time, global markets are facing challenges as economic stimulus in key regions remains limited, adding to the broader picture of uncertainty across financial markets.

‍