10-year Treasury climbs to highest in a month as investors continue to price in more monetary tightening by Federal Reserve

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Long-dated Treasurys sold off again on Tuesday, pushing the benchmark 10-year and 30-year rates to their highest since late October, as investors continued to price in more monetary tightening by the Federal Reserve.

What are yields doing?
  • The 10-year Treasury note TMUBMUSD10Y, 1.669% yield rose 4 basis points to 1.665%, compared with 1.625% at 3 p.m. Eastern Time on Monday. That’s the highest since Oct. 21 based on 3 p.m. levels, according to Dow Jones Market Watch.
  • The 2-year Treasury noteBX:TMUBMUSD02Y rate was at 0.606%, versus 0.580% on Monday, putting the yield around its highest since March 2020.
  • The 30-year Treasury bond TMUBMUSD30Y, 2.026% yield rose 4.4 basis points to 2.022%, up from 1.978% Monday afternoon. That’s the highest since Oct. 26.
What’s driving the market

Treasury yields are rising on bets that Federal Reserve Chairman Jerome Powell, who is being renominated to a second term by President Joe Biden, has a new mandate to accelerate the pace of the Fed’s reduction of monthly asset purchases, with an eye toward curbing a surge in inflation and eventually lifting interest rates.

Similar moves like the rise in the 10-year Treasury yield were seen in the yield’s counterparts in the U.K. and Germany as markets continued to price in more monetary tightening from the Federal Reserve, the Bank of England and the European Central Bank, according to TradeWeb. The 10-year U.K. Gilt yield has climbed to 0.975% while the 10-year German Bund yield is less negative at minus 0.233%, TradeWeb data shows.

Tuesday’s rise in long-dated Treasury yields follows Monday’s selloff in bonds, which led to the sharpest climb for the 2s, 10s and 30-year government rates since Nov. 10, according to Dow Jones Market Data. The 2-year Treasury note yield, the most sensitive to changing interest-rate expectations, is hanging around its highest level since March of 2020.

The selloff in bonds also has been amplified by seasonally lower volumes, analysts say, noting that the days before U.S. Thanksgiving tends to be comparatively thinly
traded.

In Monday’s data releases, the IHS Markit U.S. flash composite purchasing managers indexes for the manufacturing sector rose to 59.1 in November from 58.4 previously, while the gauge for services dropped to 57 from a prior reading of 58.7. Though the economy continues to run hot, the rate of expansion in business activity has slowed this month, underscoring the continued struggle with supply constraints, according to Chris Williamson, IHS Markit’s chief business economist.

Meanwhile, the White House announced the release of 50 million barrels of oil from strategic reserves, in coordination with other countries, to help ease pricing pressures, surging demand, and supply-chain bottlenecks, though crude oil futures recovered quickly.

Read: U.S., Other Countries to Tap Strategic Oil Reserves in Bid to Tame Inflation

In Tuesday’s session, an auction of $24 billion in 2-year of floating rate Treasury notes led to indirect bidders taking down a record share, according to Jefferies LLC economists Thomas Simons and Aneta Markowska. In addition, a $59 billion sale in seven-year TMUBMUSD07Y, 1.582% notes “was strong with a stop through of 1.1 bp,” said strategist Ben Jeffery of BMO Capital Markets.

What strategists are saying

“Monday’s sell-off continued overnight, primarily because there’s nothing to stop it before the US holiday.  Volumes fell quickly after the triple hit from hawkish EU central bank talk, the big increase in real rates after Powell’s reappointment, and two weak Treasury auctions”,  wrote Jim Vogel, executive vice president at FHN Financial.