Treasury Yields Hit Highest Level Since 2007

The U.S. bond-market selloff resumed Monday, driving 10-year yields to a 16-year high, as the persistently resilient economy has investors positioning for interest rates to remain elevated even after the Federal Reserve winds up its hikes.

The selling pressure weighed on typical Treasuries as well as those that provide extra payouts to cover inflation, signaling that bondholders are bracing for the risk that monetary policy will remain tight as the central bank guards against a re-acceleration in inflation.

The yield on 10-year inflation-protected Treasuries on Monday pushed over 2 percent for the first time since 2009, extending its ascent from year-to-date lows near 1 percent. Not long after, the yield on 10-year Treasuries without that protection surpassed October’s peak, climbing nearly 10 basis points (bps), to as much as 4.35 percent, a level last seen in late 2007, before slightly paring the gain.

The policy-sensitive two-year yield also briefly pushed over 5 percent late in the New York trading day, leaving it shy of the 2023 peaks notched early last month and in March.

The jumps extend the major shift that has raced through the bond market over the past two weeks as the odds of a recession recede and large federal budget deficits increase the supply of Treasury debt. That’s driven investors to sharply push up rates on longer-term bonds, which had tumbled deeply below those on short-term ones due to fears the economy was poised for a contraction.

Analysts say the recent moves have been exaggerated by light late-summer liquidity, with trading volumes on Monday subdued. “The move higher across the curve over the last few weeks has really been all on the real-yield side,” said Zachary Griffiths, senior fixed-income strategist at CreditSights, citing a “higher Fed policy rate or better growth expectations, with little shift in breakeven inflation expectations.”

The 10-year real—or inflation-adjusted—yield has risen sharply, from around 1.5 percent in mid-July and just above 1 percent earlier this year. On Monday, the 30-year real yield rose 2 bps to 2.11 percent.

The movements have fanned expectations that the U.S. bond market is closing the door on the post-financial crisis era of ultra-low rates, anticipating that the Fed will hold interest rates elevated for longer than markets had expected. The movement has come even as swaps traders are still pricing in that the Fed is likely done with its rate hikes and will be easing policy next year.

“The continued better-than-expected economic data has made it like we are almost contemplating a new reality that we haven’t had for quite some time, where rates could potentially be quite higher for quite longer,” Griffiths said. “That’s the big thing driving real yields.”

Bond investors are bracing for upcoming auctions of 20-year bonds and 30-year TIPS, which have smaller investor bases than other Treasury products. Demand will be closely followed for any hint that the current rout is nearing an end, or perhaps has further room to run.

The debt sales arrive before the Fed’s annual gathering at Jackson Hole, with the market anticipating a hawkish tone from Chair Jerome Powell when he speaks Friday.

“The technicals are with the bond bears,” said Andrew Brenner, head of international fixed income at NatAlliance Securities. But, he added, “in a slow August, illiquid holiday week, they have nothing to fear, as the world expects Powell to be hawkish.”

—With assistance from Elizabeth Stanton.

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