10-year yield falls more than 2 bps to 5.286%

30-year yield also eases to 5.661%

Persistent services inflation keeps pressure on long-term rates

'Fed's influence over long-term market far more limited'

A New York Stock Exchange file image [123RF]
A New York Stock Exchange file image [123RF]

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US Treasury yields, which had surged to their highest level in 24 years, reversed course as the likelihood of the Federal Reserve holding interest rates steady at its October meeting grew, pulling yields across the curve lower in unison.

However, analysts on Wall Street say the recent spike in long-term yields cannot be explained simply by the Fed's benchmark interest rate path. With high oil prices, a prolonged Middle East conflict and US fiscal pressures all pushing long-term rates higher, some say the bond market is sending more important signals about the US economy than the Fed itself.

The yield on the 10-year US Treasury note fell more than 2 basis points (1 bp = 0.01 percentage point) to 5.286% on Tuesday (local time), according to CNBC. The retreat came after yields climbed to their highest level since April 2002 — a roughly 24-year peak.

The 30-year Treasury yield also edged down to 5.661%, while the 2-year yield dropped more than 3 basis points to 4.798%. Bond prices and yields move in opposite directions.

US Treasury yields had risen sharply in recent weeks as concerns over inflation driven by high oil prices combined with the possibility of further Fed tightening. The 10-year and 30-year yields — the long end of the curve — climbed to 24-year highs, stoking fears that borrowing costs across the US economy could remain elevated for an extended period.

Markets are paying close attention to stubbornly persistent inflation pressure in the services sector.

The Institute for Supply Management's services purchasing managers index for September came in at 54.9, above the 50 threshold that separates expansion from contraction. The services price index climbed 1.4 percentage points from the prior month to 74.

The sustained price pressure in services, compounded by elevated global oil prices, has raised concerns that inflation may not return to the Fed's target level quickly — a dynamic analysts say has been driving Treasury yields higher.

Markets, however, assign a low probability to the Fed raising rates further this month. According to CME Group's FedWatch tool, fed funds futures are pricing in roughly an 80 percent chance that the Fed holds its benchmark interest rate steady at the Oct. 27-28 Federal Open Market Committee meeting.

The Fed raised its benchmark interest rate by 0.25 percentage point last month to a range of 3.75 to 4.00 percent annually — its first rate increase in three years and two months since July 2023.

Yet Wall Street's attention is shifting away from the short-term rates the Fed directly controls toward the long-term Treasury market. Even if the Fed holds rates steady this month, there is no guarantee that long-term yields will fall in tandem.

"The bond market is currently sending more important signals than the stock market," said David Miller, chief investment officer at Catalyst Funds. "The Fed can exert influence over the short-term market, but its influence over the long-term market is far more limited."

Long-term Treasury yields reflect not only the Fed's benchmark rate but also investors' collective outlook on future inflation, economic growth, fiscal deficits and government bond supply.

Even if the Fed stops raising rates, investors worried about prolonged inflation or fiscal pressures may demand higher yields as compensation for holding long-term Treasuries — keeping 10-year and 30-year rates elevated.

Lisa Shalett, chief investment officer at Morgan Stanley Investment Management, cited increased bond market volatility over the past six weeks, pointing to the Fed's policy stance, economic growth, elevated global oil prices and the prolonged Middle East conflict as the main drivers.

She added, however, that the recent volatility has not reached a level severe enough to destabilize financial markets broadly. "Intraday implied volatility has risen, but the volatility over the past six weeks has not reached the extreme levels that triggered the 2022 equity bear market," Shalett said.

As a result, market attention is focused not only on the Fed's next rate decision but also on when — and by how much — long-term yields, now above 5 percent, will come down. Even if the Fed slows the pace of tightening, persistently high long-term rates would keep borrowing costs elevated across the real economy, including mortgage and corporate lending.


sjy@heraldcorp.com