The runway for higher Treasury yields has cleared as traders see it as a sure thing that the Federal Reserve will start to normalize monetary policy next month as the economy improves and inflationary threats build.
Ten-year yields broke through a pivotal 1.6% level on Friday, putting it within a rate zone perceived as triggering selling of Treasuries related to mortgage-debt hedging. The benchmark has risen for seven straight weeks, leaving holders of debt with this maturity or greater in the red by more than 8% this year, a Bloomberg index shows.
Even below-forecast job creation in September didn’t take the pressure off the Fed to act as it came with robust wage gains. That data, along with a backdrop of surging energy prices, have investors doubting that inflation will prove transitory as many Fed policy makers insist.
While there’s almost four weeks until the Fed’s next policy meeting, Wednesday’s release of minutes from its last gathering may give more clues on officials’ thinking. An update on consumer prices is on the radar with the measure having run the prior four readings at an annual pace of at least 5%. Bond-market measures of inflation-expectations rose this week to their highest since May, after trading in a tight range for months.
“These inflationary pressures, globally, are front and centre now,” said Gregory Faranello, head of US rates at AmeriVet Securities in New York. “And the Fed has been hammering home that there will be no rate increases until tapering is done, so they need to get on with the taper. If they don’t, then at some point the markets may challenge the Fed – pricing up yields.”
The 10-year Treasury yield, now at about 1.6% versus under 1% at the start of the year, will finish 2021 in the 1.75% to 2.25% range, Faranello predicted.
The Fed is currently buying $120 billion a month in debt purchases, made up of $80 billion in Treasuries and $40 billion worth of mortgage-backed securities.