Treasury yields eased slightly Friday morning, but remained near their highest levels in a decade or more, days after the Federal Reserve signaled that it will keep interest rates high for an extended period of time.
What’s happening
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The yield on the 2-year Treasury
BX:TMUBMUSD02Y
was 5.127%, down 2.1 basis points from 5.148% on Thursday. Thursday’s level was the highest since July 18, 2006, based on 3 p.m. Eastern time figures from Dow Jones Market Data. -
The yield on the 10-year Treasury
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was 4.473%, down less than 1 basis point from 4.479% as of Thursday afternoon. The 10-year rate finished Thursday at its highest level since Oct. 18, 2007. -
The yield on the 30-year Treasury
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was 4.559%, little changed versus 4.55% late Thursday. The 30-year rate ended Thursday at its highest level since April 13, 2011.
What’s driving markets
Treasury yields closed at their highest levels since 2006-2011 on Thursday as investors absorbed the Federal Reserve’s rate projections from the prior session, which suggested that another interest-rate increase is on the way by year-end and that borrowing costs are likely to be cut in 2024 by less than previously thought.
Policy makers held the fed funds rate target unchanged at between 5.25%-5.5% on Wednesday, and moved up their median forecast for where interest rates will end up next year by a half percentage point, to 5.1% versus 4.6% previously.
Read: ‘The world has changed’ as investors absorb highest Treasury yields in more than a dozen years
In Friday’s data releases, the S&P flash U.S. services business activity index slipped to an eight-month low of 50.2 in September and the manufacturing purchasing managers’ index advanced to a two-month high of 48.9.
See: Economy loses momentum toward end of summer, S&P surveys show
Bill Ackman, chief executive of Pershing Square Capital Management, said his hedge fund management company remains short on bonds, and that an appropriate yield for the 30-year Treasury is 5.5%.
Outside the U.S., the Bank of Japan kept the parameters of its yield curve control program intact on Friday, and maintained a pledge to add stimulus if needed.
What analysts are saying
“The storm in U.S. bond markets has evolved into a hurricane” inflicting deep wounds on riskier assets such as stocks on Thursday, said Marios Hadjikyriacos, senior investment analyst at XM, a Cypress-based multi-asset brokerage.
“When yields climb with such force, it has repercussions for every other asset class. Since yields are essentially market-determined interest rates, a move higher incentivizes investors to increase their allocation to cash and decrease their exposure to riskier plays like equities. This dynamic was on full display yesterday, with the S&P 500 losing 1.6% of its value as yields charged higher,” the analyst wrote in a note on Friday.
“With a deluge of supply set to hit the bond market next quarter while the Fed retains a stance of higher interest rates for longer, the upward pressure on yields could persist,” Hadjikyriacos said.
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