The U.S. Treasury building in Washington, D.C., on August 15, 2023. Photographer: Nathan Howard/Bloomberg.
Treasuries began the week on the back foot after a U.S. government shutdown was narrowly averted, eliminating a point of uncertainty for traders and returning their focus to the path ahead for interest rates.
Yields climbed across the curve in Asia trading Monday, with those on 10-year debt rising as much as 5 basis points (bps), to 4.62 percent. Five-year yields rose by a similar amount, to 4.66 percent, once more approaching a 16-year high.
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Traders are back focusing on what U.S. policymakers have been repeating all year: that higher-for-longer interest rates are here to stay. The funding deal may also spur investors to bring forward bets of a November rate hike from December, adding to bearish sentiment in the world's biggest bond market.
"Previously, the market had assumed that the government would be shut down for the November meeting, so the pricing favored a December hike," said Kevin Muir, a former trader who now writes the MacroTourist newsletter. "With these new developments, my guess is that the market will price in a greater chance of a November hike, which will mean more pressure at the front end of the curve."
A look at the swaps market showed traders see just under a one-in-three chance of a rate hike in November, according to data compiled by Bloomberg.
Leveraged fund short positions on longer-dated Treasuries remained near record levels, according to the latest data from the Commodity Futures Trading Commission (CFTC). Their asset manager counterparts are sticking with equivalent levels of bullish bets.
The risk that a government shutdown might disrupt the data available to policymakers trying to decide whether to hike rates again this year may also have weighed on traders minds.
"One could argue the market had discounted the idea the Fed wasn't going to be privy to this important data to make an informed call on a November hike," Chris Weston, head of research at Pepperstone Group Ltd., wrote in a note to clients. "We should see these rate hike expectations lift a touch."
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