Blog

Jul 21, 2023

TREASURIES

(Recasts lead, adds comment in paragraphs 3-4, updates prices at 10:51 a.m. EDT) By Herbert Lash NEW YORK, Aug 22 (Reuters) - The benchmark 10-year Treasury yield hit almost 16-year peaks on Tuesday

(Recasts lead, adds comment in paragraphs 3-4, updates prices at 10:51 a.m. EDT) By Herbert Lash NEW YORK, Aug 22 (Reuters) - The benchmark 10-year Treasury yield hit almost 16-year peaks on Tuesday in a bond market rout driven by concerns that the Federal Reserve will keep interest rates higher for longer that likely will be compounded by the government's growing fiscal deficit. Increased Treasury issuance, Fitch's credit downgrade three weeks ago and the likelihood that China sells Treasuries to support the yuan are contributing to a sell-off as investors await the Fed's annual symposium in Jackson Hole, Wyoming, this week. "With the Fed on the march, not necessarily to hike rates in September, but to keep rates higher, buyers haven't been as willing to come in and pick up these yield levels," said Kim Rupert, managing director of global fixed income at Action Economics in San Francisco. "There's almost a perfect storm against Treasuries," she said. "In the context of everything and then with the Treasury refunding, they put it in black and white, the borrowing needs, the market gulped and said ‘Well, maybe this is not a good thing'.” S&P Global followed Moody's in cutting its credit ratings and outlook on multiple U.S. regional banks on Monday, saying higher funding costs and troubles in commercial real estate will likely test the credit strength of lenders. The yield on 10-year Treasuries was down 1 basis point at 4.332% after touching 4.366% - a high last seen in November 2007. The two-year's yield, which often reflects interest rate expectations, rose 3.9 basis points to 5.031%. Gary Dugan, chief investment officer at Dalma Capital, cautioned that a reacceleration in global growth combined with sticky core inflation was pushing investors to consider levels of long-term rates that were "previously unthinkable." "We believe that there are good arguments for why a 5% U.S. 10-year bond yield is quite possible," he warned. The rout partly reflects a run of surprisingly upbeat U.S. economic news that has led markets to scale back expectations for policy easing next year. Futures now imply 94 basis points of rate cuts in 2024, compared with 130 basis points a couple of weeks ago. Washington also needs to borrow ever more to fund its $1.6 trillion budget deficit, and lenders are demanding higher returns over and above inflation. As a result, real yields on 10-year inflation-protected Treasuries, or TIPS, have climbed 36 basis points so far this month to top 2.0% for the first time since 2009. The yield on 10-year TIPS fell 2.5 basis points to 1.978%. Also feeling the heat are the low-yielding Japanese yen and Chinese yuan as they struggle near multi-month lows on the U.S. dollar. Beijing has already reportedly intervened to support its currency, while markets are wary that Japanese action could come if the dollar threatens 150 yen. August 22 Tuesday 10:51 a.m. New York / 1451 GMT Price Current Yield % Net Change (bps) Three-month bills 5.3 5.4631 0.019 Six-month bills 5.295 5.5166 0.003 Two-year note 99-124/256 5.0309 0.039 Three-year note 98-254/256 4.7414 0.037 Five-year note 98-118/256 4.4753 0.016 Seven-year note 97-112/256 4.4327 0.004 10-year note 96-84/256 4.332 -0.010 20-year bond 90-88/256 4.6262 -0.024 30-year bond 95-4/256 4.4268 -0.029 (Reporting by Herbert Lash, additionl reporting by Ankur Banerjee in Singapore and Wayne Cole in Sydney; Editing by Edwina Gibbs, Sam Holmes and Jonathan Oatis)