The Bond Yields Start the Week Higher

Early Monday morning, U.S. government bond yields briefly spiked before pulling back as traders turned their attention to a week filled with important data on economic growth, inflation, and the labor market.

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Current State of Treasury Yields

‍The yield on the 2-year Treasury note was relatively flat, standing at 4.1%, compared to 4.096% from Friday afternoon. Meanwhile, the 10-year Treasury yield remained stable at 4.236%, having touched a high of nearly 4.3% earlier in the session. Similarly, the 30-year Treasury yield was little changed, hovering around 4.497%, down slightly from its 4.5% level on Friday. It’s important to note that bond yields and prices move in opposite directions, meaning when yields rise, bond prices fall.

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Factors Affecting the Market

‍The initial rise in Treasury yields on Monday was driven by news of a limited military strike by Israel on Iran over the weekend. This led some investors to shift away from safer assets like Treasurys, causing yields to briefly spike. However, the scope of the attack was small, targeting non-critical sites, and avoided vital energy and nuclear infrastructure. As a result, the market was not significantly destabilized, and immediate fears of retaliation subsided, allowing yields to stabilize.

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Michael Darda, the chief economist and market strategist at Roth Capital Partners, noted that the increase in the 10-year Treasury yield can be attributed to a rise in the term premium, which has gone up by 44 basis points since mid-September. The term premium represents the additional yield investors demand for holding longer-term bonds instead of shorter-term ones, and its recent increase has contributed to the uptick in Treasury yields.

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Several factors have influenced this rise in yields, according to Darda. First, a stronger-than-expected September jobs report, combined with an upward revision in third-quarter gross domestic product (GDP) estimates from the Atlanta Federal Reserve, has changed market expectations about the Federal Reserve’s interest rate trajectory. Investors now anticipate a slower pace of rate cuts, with the terminal Fed funds rate expected to settle at 3.6%, up from the 2.9% predicted in mid-September.

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Additionally, concerns about the possibility of a "red wave" in the 2024 U.S. elections, where Republicans could potentially take control of the White House and Congress, have created unease. Market participants fear that a Republican-controlled government might introduce a mix of supply-side economic policies and increased fiscal spending, which could worsen the already fragile U.S. budget outlook.

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Upcoming Treasury Auctions and Debt Issuance

‍Monday’s session also included important Treasury auctions, with the U.S. government selling $69 billion in 2-year notes and another $70 billion in 5-year notes. These auctions are a key part of the government’s efforts to finance its debt, and their results often provide insight into investor demand for U.S. government bonds.

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Looking ahead, the Treasury is expected to announce its financing estimates for the fourth quarter, with further details to come on Wednesday. According to strategists at BNP Paribas, the Treasury is projected to issue $600 billion in marketable debt between October and December, followed by approximately $750 billion between January and March. This suggests a robust issuance schedule as the government seeks to meet its funding needs. BNP Paribas also expects the Treasury to maintain the size of its nominal coupon auctions through the November refunding and into early 2025.

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‍Investors are eagerly awaiting several major economic reports this week, which could further influence market sentiment and the direction of bond yields. The U.S. government is scheduled to release third-quarter GDP data on Wednesday, providing a snapshot of economic growth during the summer months. Strong GDP growth could bolster expectations of higher interest rates for longer, while weaker data might ease concerns about future rate hikes.

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On Thursday, the September Personal Consumption Expenditures (PCE) price index will be released, offering fresh insight into inflation trends. The PCE price index is closely watched by the Federal Reserve as a key measure of inflation, and any signs of rising prices could prompt the central bank to maintain its hawkish stance on interest rates.

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Finally, the October nonfarm payrolls report is due out on Friday, giving investors a clearer picture of the labor market. A strong jobs report could reinforce the notion that the economy remains resilient despite higher interest rates, while a weak report might suggest that the labor market is starting to cool.

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Conclusion

‍As traders look ahead to a week of crucial economic data, U.S. government bond yields are holding steady after an early rise. The market remains sensitive to geopolitical developments and economic reports that could shift the Federal Reserve’s policy outlook. Investors will closely watch Wednesday’s GDP data, Thursday’s inflation report, and Friday’s labor market update, all of which could have significant implications for interest rates and Treasury yields moving forward.

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