Longer-dated U.S. Treasury yields dipped from 16-year highs on Wednesday after 30-year yields briefly soared above 5% overnight, then fell to session lows after data indicated that U.S. employment growth in September was lower than experts had predicted.
Yields have risen as investors price in the possibility that the Federal Reserve would keep rates high for longer and possibly raise them again if the economy remains resilient and inflation remains above the Fed’s 2% target.
However, jobless claims on Wednesday provided some relief to the bond market. According to the ADP National Employment Report, private payrolls in the United States expanded significantly less than predicted in September, with 89,000 jobs added during the month.
“Growth wasn’t that robust,” Ellis Phifer, managing director of fixed income research at Raymond James in Memphis, Tennessee, said on Wednesday, adding that decreasing oil prices are also aiding bond demand.
The primary economic emphasis this week will be Friday’s September jobs report, which is expected to indicate that businesses added 170,000 positions.
Benchmark 10-year notes US10YT=RR reached 4.884%, while 30-year rates US30YT=RR reached 5.011%, both reaching highs not seen since 2007, before sliding back to 4.737% and 4.878%, respectively.
US2YT=RR, the interest rate-sensitive two-year yield, was last at 5.050%. They are currently trading below the 5.202% level reached on September 21, which was the highest since July 2006.
Investors are particularly concerned about the possibility that rising interest rates would lead to a recession, with many analysts anticipating difficulties in the fourth quarter and into 2024.
“I believe the real reason the long end has been in free fall is primarily due to the yield curve steepening trade,” said Tom di Galoma, managing director and co-head of global rates trading at BTIG in New York.
After inverting as far as 111 basis points in March and July, the yield curve between two-year and 10-year notes US2US10=TWEB touched minus 30 basis points on Wednesday. Since July 20, 2022, it has been inverted.
An inversion in this area of the curve is thought to predict an economic downturn, but the yield curve usually returns to positive territory before a recession begins.
However, the recent steepening of the yield curve has been led by increases in longer-dated loan yields, which contrasts with earlier periods when the steepening before a recession is driven by front-end rates decreasing faster than long-term rates.
“This one’s a little bit different,” Phifer said, noting that the Fed usually starts decreasing rates before a recession is proven.
Analysts believe that the recent sell-off in longer-term bonds will be reversed if there are clear indicators of economic slowdown or if rising interest rates cause other severe market disruptions.
“I struggle to see how the recent yield moves don’t increase the risk of an accident somewhere in the financial system,” said Jim Reid, a strategist at Deutsche Bank.
This week’s technical issues have also been seen as contributing to the selloff, with traders noticing a lack of support levels on 10-year Treasury yields between 4.5% and 5.0%.
Mortgage hedging is increasing as 30-year mortgage rates approach 8%, and weakness in European government bonds is compounding volatility in US Treasuries, according to di Galoma.
“There’s hedging, the yield curve is steepening, and rates in Europe are continuing to rise… “There are several reasons why the long end is giving way,” he explained.
The average 30-year mortgage rate in the United States jumped 12 basis points to 7.53% last week, the highest since November 2000, according to the United States Mortgage Bankers Association on Wednesday.
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