30-year Treasury yield rises above 5% on resilient U.S. economy

What’s happening

• The yield on the 2-year Treasury
  BX:TMUBMUSD02Y
  was up less than 1 basis point at 5.217% versus Tuesday’s level of 5.212%, which was the highest close since July 6, 2006.

• The yield on the 10-year Treasury
  BX:TMUBMUSD10Y
  rose 5.7 basis points to 4.903% from Tuesday’s level of 4.846%, which was the highest 3 p.m. Eastern time level since July 25, 2007.

• The yield on the 30-year Treasury
  BX:TMUBMUSD30Y
  jumped 5.6 basis points to 5.007% from Tuesday’s level of 4.951%, which was the highest close since Aug. 22, 2007. The rate touched an intraday high of 5.014% during Wednesday morning trading in New York.

What’s driving markets

Inflation concerns were in focus on Wednesday, reinforced by oil prices moving back toward highs seen in late September amid increasing tensions in the Middle East. Oil surged 3% on Wednesday, as Iran reportedly calling for an embargo on selling oil to Israel.

In U.S. data released on Wednesday, housing starts rebounded 7% in September to an annual pace of 1.36 million units.

A strong retail sales report released on Tuesday pointed to a U.S. economy that’s remaining resilient, which suggests the Federal Reserve may need to keep interest rates higher for longer. Morgan Stanley economists revised their third-quarter GDP estimate to 4.9%, up from 4.5% previously. Meanwhile, the Atlanta Fed’s GDPNow estimate for third-quarter GDP was changed to 5.4%, up from a 5.1% estimate on Oct. 10.

Markets are pricing in an 86.8% probability that the Fed will leave interest rates unchanged at a range of 5.25%-5.5% on Nov. 1, according to the CME FedWatch Tool. The chances of a 25-basis-point rate hike to a range of 5.5%-5.75% by December was seen at 35.1%.

Treasury will auction $13 billion of 20-year bonds at 1 p.m. Eastern time.

Also on Wednesday, the Bank of Japan announced another round of unscheduled bond purchases after the country’s 10-year bond yield hit a fresh decade-high of 0.815%, according to Bloomberg.

What analysts are saying

“Economic news out of the US continues to dumbfound expectations. September retail sales expanded by 0.7% month-on-month, comfortably above the 0.3% consensus and the sixth straight month of positive gains. Most economists, and indeed the Federal Reserve itself, had warned that a slowdown in consumer spending, and even a recession, was likely on the way towards the end of this year,” said Matthew Ryan, head of market strategy at global financial services firm Ebury in London.

“The main draw will, however, be an appearance from FOMC chair Jerome Powell in New York on Thursday, who will be speaking on the topic of the US economic outlook,” Ryan said. “At present, futures are back assigning more than a 50% chance of another FOMC hike by January, an upward repricing that has lifted US Treasury yields back up towards their early-October highs.”