The 10-year Treasury yield, which is a key indicator for loans like mortgages and car loans, rose above 4% on Monday. This increase comes despite the Federal Reserve starting a campaign to lower interest rates last month. The 10-year yield went up by about 3 basis points to hit 4%, the highest it has been since early August. This is a significant change from its low of around 3.58% just over a month ago. Additionally, the yield on the 2-year Treasury also increased, going up by over 6 basis points to 3.99%. It’s important to note that yields and prices move in opposite directions – so when yields go up, prices go down.
The rise in Treasury yields was driven by a better-than-expected September jobs report. The report showed that nonfarm payrolls increased by 254,000 jobs in September, surpassing the 150,000 jobs that economists had predicted. This positive jobs data has led to a decrease in expectations that the Federal Reserve will make another large rate cut, similar to the half-point cut that occurred on September 18. As a result, the CME Group’s FedWatch tool now shows that traders are predicting a 91% chance of a quarter percentage point rate cut at the Fed’s next meeting in November.
Ian Lyngen, who is the head of U.S. Rates Strategy at BMO Capital Markets, stated that the U.S. rates market will be closely monitoring the impact of the strong payrolls report on monetary policy in the upcoming week. While a pause in rate cuts is not the base case scenario, there is a possibility that the Fed may reconsider cutting rates in November. This uncertainty has led to a resetting of rate-cut expectations among investors.
The rebound in rates can also be attributed to rising oil prices due to tensions in the Middle East and a stimulus plan in China. These factors have raised concerns about inflation potentially increasing, prompting some investors to move away from bonds and causing yields to rise. The Consumer Price Index (CPI) reading for September is set to be released on Thursday, which will provide further insight into inflation trends.
Looking ahead, speeches are scheduled from Fed officials Neel Kashkari, Raphael Bostic, Michelle Bowman, and Alberto Musalem on Monday. Additionally, the 10-year Treasury auction will take place on Wednesday. The Federal Reserve is expected to make its next decision on rates on November 7, just two days after the U.S. election. The October jobs report is set to be released on November 1, providing more data for analysts to consider.