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Bond Report: 10-year Treasury yield settles above 3% for first time in a month

Yields on the 10- and 30-year Treasury notes climbed on Monday to their highest levels since July as investors awaited an update from Federal Reserve Chairman Jerome Powell later in the week.

What’s happening

The yield on the 2-year Treasury

rose to 3.335% from 3.265% on Friday at 3 p.m. Eastern, its highest since June 14. Yields move in the opposite direction to prices.

The yield on the 10-year Treasury

advanced to 3.035%, its highest since July 20, compared with 2.987% Friday.

The yield on the 30-year Treasury

was 3.241% versus 3.225% on Friday. It marked the highest since July 8.

Rising yields caused the spread between the two-year and 10-year note to widen somewhat, although still deeply in negative territory. Economists see an inverted Treasury yield curve as a sign of a looming recession to come.

What’s driving markets

As Treasury yields continue to move higher, the 10-year note yield, often cited as the benchmark for Wall Street, topped 3% as many traders see the Federal Reserve as determined to reaffirm its intention to quash inflationary pressures by aggressively raising interest rates this year.

Meanwhile, the 2-year yield, which is more sensitive to changes in the Federal Reserve’s interest-rate policy, is nearing its highest level in more than a decade.

“The Fed has pushed back consistently against the market’s pricing of a Fed turnaround to easing rates next year with partial success, as expectations for rate cuts have shifted farther out the curve and from higher levels,” said strategists at Saxo Bank.

The Saxo strategists said the key test for markets this week may come on Friday when the Fed’s preferred measure of inflation, the July PCE inflation data, is released. Fed Chair Powell also will deliver an update on the Fed’s outlook Friday when he speaking at the central bank’s annual economic symposium in Jackson Hole, Wyo.

Markets already have been anticipating a more hawkish stance from the Fed. Fed funds futures markets are pricing in a 54.5% probability that the Fed will raise interest rates by another 75 basis points when it meets in September. That’s a major shift from earlier this month, when traders favored a hike of 50 basis points as the most likely outcome.

Looking further ahead, Fed funds traders see a 50% chance that the central bank could raise its benchmark interest-rate target to 4% or higher by March 2023.

The 10-year Treasury yield had fallen from an 11-year high of about 3.5% in June to as low as 2.5% by the start of August on hopes that signs of peak inflation could mean the Fed might slow its pace of rate hikes and even start trimming borrowing costs in 2023.

Data released on Monday showed the U.S. economy had some momentum in July. The Chicago Fed National Activity Index rose to 0.27 in July from a revised reading of minus 0.25 in June, beating the minus 0.10 consensus forecast from economists polled by FactSet.

What analysts are saying

“We believe the Fed will need to see convincing evidence that inflation is well on its way back to target before it is willing to cut rates. The Fed likely does not need to see inflation fall all the way back down to 2% but needs to trust there has been sufficient demand destruction to soon reach its inflation target,” said rates strategist Meghan Swiber and others at BofA Securities.

“Cuts in late-2023, as the market and our economists currently anticipate, are feasible under the conditions that inflation declines towards target and we see a moderation in jobs growth,” the BofA team wrote in a note.

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