Treasury yields surged to their highest level in four weeks and the inversion of the yield curve between the two-year and 10-year notes narrowed to the narrowest gap in two weeks, reflecting concerns about rising inflation and growth.
The 10-year U.S. Treasury yield closed at 4.623% on Wednesday, up from 4.471% at the end of last week. In just two weeks, the 10-year U.S. Treasury yield has risen 30 basis points. U.S. 2- to 30-year Treasury yields also reached their highest levels since early May.
Strong economic data and growing uncertainty over whether the Federal Reserve will cut interest rates sent bond yields to their highest level in a month.
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A sharp rise in U.S. Treasury yields has rattled risk assets globally, with U.S. stock markets falling sharply and Asian and Indian stock markets following suit over the past few sessions.
The main factors driving the rise in Treasury yields are:
Weakness in debt auctions
Treasury yields soared after another weak bond auction on Wednesday, as investors demanded higher yields than market rates due to relatively low interest. Reuters reported that an auction of $44 billion in seven-year U.S. Treasury notes produced a high yield of 4.65%, above the expected yield at the time of the deadline for auctions, suggesting that investors were seeking a premium for bond purchases.
The bid-to-cover ratio, an indicator of demand, was 2.43, down from last month’s 2.48 and the average of 2.55.
The seven-year note auction followed similarly lackluster auctions of two- and five-year notes on Tuesday, raising concerns about future demand for government bonds.
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Concerns about interest rate cuts
Weak bond auctions, positive economic data and hawkish comments from Federal Reserve officials further reduced expectations of a rate cut in the world’s largest economy.
Expectations for a September rate cut have fallen to 47% from 58% last week, according to the CME FedWatch tool, and futures markets are now expecting a rate cut of around 31 basis points (bps) this year, down from more than 50 bps earlier this month.
Minutes from the Federal Reserve’s most recent meeting, released last week, also indicated uncertainty among policymakers about when to ease monetary policy.
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Fed’s Kashkari
Comments from Minneapolis Federal Reserve Bank President Neel Kashkari further stoked concerns about the timing of a rate cut, sending yields higher.
In an interview, Kashkari said the Fed should wait to see a significant improvement in inflation before cutting rates, saying it needs “many more months of positive inflation data” before confidence begins to ease.
Beige Book Survey
According to the Federal Reserve’s Beige Book survey, economic activity expanded “slightly or moderately” in most regions from early April to mid-May, but consumer demand weakened, businesses became more pessimistic about the future, and inflation continued to rise at a moderate pace.
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US Consumer Confidence
U.S. consumer confidence unexpectedly improved in May after three consecutive months of declines. The index, which measures both Americans’ assessment of their current economic situation and their outlook for the next six months, rose to 102.0 this month from an upwardly revised 97.5 in April, the Conference Board said. Economists surveyed by Reuters had expected the index to fall to 95.9 from the previous reading of 97.0.
Investors are now awaiting the release of the U.S. core personal consumption expenditures (PCE) price index report – the Fed’s preferred inflation gauge – on Friday and the May employment report a week later for further clues about the Fed’s next policy actions.
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(Quoted from Reuters)
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