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Bond Report: 2-year Treasury yield marches toward 4%, 10-year yield highest since 2011


Treasury yields were higher Monday, led by the 2-year rate, and adding to last week’s big surge ahead of Wednesday’s Federal Reserve interest-rate decision.

The policy-sensitive 2-year yield moved closer to 4%, a level that some say could send shivers through financial markets. The last time the 2-year yield closed at 4% or higher was on Oct. 16, 2007, when it reached 4.127%.

What’s happening

The yield on the 2-year Treasury

rose 8.7 basis points to 3.946% at 3 p.m. Eastern, its highest such level since Oct. 17, 2007. Yields move in the opposite direction to prices.

The yield on the 10-year Treasury

rose 4.2 basis points to 3.489%, its highest since April 12, 2011.

The yield on the 30-year Treasury bond

fell 1.4 basis point to 3.504%.

Last week, when a report showed hotter-than-forecast core inflation for August, the yield on the 2-year Treasury rose 29 basis points.

What’s driving markets

Attention was focused on the Federal Open Market Committee meeting that ends on Wednesday.

Futures markets were pricing in roughly a one-in-five chance the Fed will hike rates by 100 basis points instead of 75 basis points. And investors will be focused on the dot plot for signals on how high rates may go later this year and next year.

The Fed’s next rate hike is poised to push one of the Treasury market’s most reliable recessionary indicators into levels that leave little doubt about whether an economic contraction is on the way, according to pioneering yield-curve researcher Campbell Harvey. That’s the spread between 3-month and 10-year notes, which was more than 35 basis points as of Monday. The counterpart 2- and 10-year spread remains deeply inverted, at minus 47 basis points.

In the only major data release for Monday, U.S. home builder sentiment declined for a ninth straight month in September.

What analysts are saying

“We expect the FOMC to deliver a third 75bp rate hike at its September meeting, taking the funds rate to 3-3.25%. The bond market is pricing a one-in-four chance of a 100bp hike,” Jan Hatzius, Alec Phillips and David Mericle of Goldman Sachs said in a note.

“We expect the median dot to show the funds rate at 4-4.25% at end-2022, an additional hike to a peak of 4.25-4.5% in 2023, one cut in 2024 and two more in 2025, and an unchanged longer-run rate of 2.5%,” they added.

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