U.S. Treasury yields held relatively flat on Thursday as market participants processed comments from a senior Federal Reserve official and awaited a significant long-term bond auction. The benchmark 10-year yield dipped less than one basis point to 5.273%, recovering slightly from its highest level since 2002 recorded the previous trading session.
The 30-year Treasury bond yield also retreated, falling more than a basis point to 5.643% after briefly touching a 24-year high on Wednesday. In contrast, the 2-year note yield climbed more than three basis points to 4.802%, reflecting near-term rate expectations.
Federal Reserve Governor Christopher Waller stated that additional interest rate hikes remain necessary to lower inflation, which has persisted above the central bank’s 2% target for over five and a half years. However, he indicated that increases need not occur at consecutive policy meetings.
Speaking at a Central Bank of Turkey forum in Istanbul, Waller emphasized that while pacing is flexible, action must be taken within “an acceptable period of time.” His remarks followed the release of September Federal Open Market Committee minutes, which revealed officials anticipate further rate increases before year-end to prevent inflation from taking hold.
Market pricing suggests investors expect the Fed to maintain current rates at its upcoming meeting on October 28, with a rate hike anticipated by December 9.
Attention now turns to the Treasury Department’s third auction of the week. On Wednesday, the government sold $39 billion in 10-year notes, with global central banks accounting for more than 80% of the demand, exceeding the historical average of 72.4%. This follows a $58 billion sale of three-year notes on Tuesday and precedes a $22 billion auction of 30-year bonds scheduled for Thursday afternoon.
Ian Lyngen, a fixed-income strategist at BMO Capital Markets, noted that the recent 10-year auction has established the current tone for the Treasury market. Despite a significant selloff between the September reopening and Wednesday’s auction, Lyngen highlighted that strong sponsorship provided some reassurance, marking the highest-yielding 10-year auction since November 2000. He described the upcoming long-bond auction as the next key indicator of investor demand.
80% foreign demand on the 10-year auction is wild. Can we really sustain that level of buying power?
Five and a half years above target is a long time. Hopefully these hikes finally work without crashing the economy.
Interesting that the 2-year rose while longer terms fell. What does that curve tell us about short-term expectations?
Yields this high haven’t been seen since 2000. Scary times for borrowers and borrowers alike.
Waller sounds hawkish, but markets seem to think a December hike is the best-case scenario. Hope I’m right!
The 30-year auction will be telling. If central banks aren’t buying, yields could spike again.