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Bond Report: 10-year Treasury yield ticks up to 14-year high

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A pullback by yields on U.S. Treasurys proved short-lived Monday as relief over the British government’s decision to rescind proposed tax cuts that had sparked chaos in U.K. government bonds providing only temporary relief.

What yields did

The yield on the 2-year Treasury note
TMUBMUSD02Y,
4.443%

fell to 4.454% at 3 p.m. Eastern, down from 4.507% on Friday afternoon. The 2-year’s Friday finish was the highest since Aug. 8, 2007, based on 3 p.m. figures, according to Dow Jones Market Data. Yields and debt prices move opposite each other.

The 10-year Treasury note
TMUBMUSD10Y,
4.015%

rose 0.7 basis point to 4.012%, for its highest finish based on 3 p.m. levels since Oct. 15, 2008.

The yield on the 30-year Treasury bond
TMUBMUSD30Y,
4.021%

rose 4 basis points to 3.014%, its highest since Aug. 1, 2011.

Market drivers

Treasury yields were pulled lower as rates on U.K. government bonds, known as gilts, fell sharply on Monday after new Chancellor of the Exchequer Jeremy Hunt abandoned the majority of the £45 billion ($51 billion) in previously announced unfunded tax cuts that were blamed for sparking a bout of global market volatility and stoking fears of a broader breakdown of the financial system.

See: U.K. chancellor throws out almost all major tax cuts from the mini-budget and pares back energy support

Hunt also pulled back on the government’s energy-price guarantee, which was to support households and businesses for two years. It will now remain universal until April 2023 and therefore will cost taxpayers “significantly less than planned,” he said.

Read: Who is Jeremy Hunt? Meet the new U.K. chancellor

Hunt replaced Kwasi Kwarteng, who was fired by Prime Minister Liz Truss at the end of last week. The tax cuts and energy-relief plan, unveiled at the end of last month, had sent U.K. bond yields soaring, stirring spillover effects in financial markets and pushing up U.S. Treasury yields. The Bank of England stepped in to buy U.K. government bonds in an effort to stabilize the market and prevent an implosion of pension funds, but with an Oct. 14 deadline.

Also see: Why Kwasi Kwarteng could not survive the battle with the Bank of England

In the U.S., Monday’s only major data release showed that New York factory activity stumbled in October. The New York Fed’s Empire State business conditions index, a gauge of manufacturing activity in the state, fell 7.6 points to negative 9.1.

Investors had initially appeared to have moved on since Thursday’s U.S. consumer-price index report, which included a year-over-year headline rate of 8.2% and hotter-than-expected monthly core reading of 0.6%. The data cemented expectations for a 75-basis-point rise in the fed-funds target rate at the Federal Reserve’s November policy meeting, while also boosting the possibility of another move of the same size at its December meeting.

What analysts say

“An 11 basis point peak to trough repricing in 10-year yields on a day with only October’s Empire manufacturing data would traditionally require another strong macro impulse to help explain the move. Alas, in the current environment we’ll characterize today’s session as just another volatile Monday as the early bid in duration was nearly completely erased and 10-year yields spent the bulk of the session reversing their decline and moving back above 4% as 2s/10s steepened back after touching -52 bp.” said BMO Capital Markets rates strategists Ben Jeffery and Ian Lyngen, in a note.

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