10-Year And 30-Year Treasury Yields Rise To Their Highest Levels Since 2007

• The 10-year Treasury yield, which serves as a benchmark for mortgage rates and as an investor confidence barometer, on Tuesday surged to its highest level since 2007. The 10-year Treasury yield was last up about 8 basis points to 4.758%. The 30-year Treasury yield rose as high as 4.874%, also the highest since 2007. The 2-year Treasury yield, which is sensitive to expectations around where the Federal Reserve will set its key borrowing rate, increased slightly to 5.129%.
• Speaking Monday, Fed Vice Chair for Supervision Michael Barr said it’s less important to focus on another hike and more critical to understand that rates likely will remain elevated “for some time.” And Cleveland Fed President Loretta Mester, a nonvoter this year on the FOMC, said “We may well need to raise the fed funds rate once more this year and then hold it there for some time.”
• Market uncertainty remains about when and whether a rate increase may be implemented. Two central bank policy meetings remain this year, Oct. 31-Nov. 1 and Dec. 12-13. Market pricing Tuesday morning was pointing to just a 25.7% chance of a hike on Nov. 1, but a nearly 45% probability in December, according to futures pricing measured in the CME Group’s FedWatch Tool.
• Rising yields come even though U.S. lawmakers were able to avoid a government shutdown as they passed a last-minute spending bill on Saturday night. That has bought them time to finish the necessary government funding legislation. A shutdown could have negatively affected the U.S. credit rating as well as the country’s economy.
• The jump in rates has rekindled talk about market “bond vigilantes,” a term coined by economist Ed Yardeni to describe the impact when fixed-income investors leave the market because of worries over U.S. debt. Persistently high fiscal deficits are one factor in the rising costs of borrowing. Public debt has risen past $32.3 trillion this year. Debt has risen to nearly 120% of total gross domestic product.
• “The worry is that the escalating federal budget deficit will create more supply of bonds than demand can meet, requiring higher yields to clear the market; that worry has been the Bond Vigilantes’ entrance cue,” Yardeni wrote Tuesday morning in a note titled “The Bond Vigilantes Are On The March.”

(Source: Reuters)