- BMO Capital Markets says Treasury yields may be set for a breakout after weeks in a narrow range. The spread between Bollinger Bands has narrowed to 24 basis points from as much as 80 on September 28, a compression technical traders read as stored energy.
- The 2-year yield has closed between 4.70% and 4.82% in every session this month, a 12 basis point closing range, while intraday swings have covered 27 basis points. The average daily trading range has climbed to 10 basis points, the highest monthly average since March.
- Safe-haven demand has kept 10-year yields near the lower end of their October range as Middle East tensions rise. At the same time, higher oil strengthens the inflation case for tightening, so the curve is being pulled in opposite directions.
- BMO expects the Fed to hold on October 28 and hike 25 basis points in December. With that hike priced at roughly 90%, the bank warns there is room for expectations to shift, and the bigger move would come from any sign of Fed hesitation.
What Happened?
In a note published Wednesday, BMO strategists said consolidation in the Treasury market is nearing the point where a sharper move becomes more likely. They wrote that “the coiling price action hints of an impending breakout” and pointed to the Fed’s October 28 decision as the probable catalyst. Treasuries held in a narrow band overnight as investors took cues from other markets. BMO also flagged Treasury supply, geopolitics and corporate earnings as factors that will keep rates sensitive.
Why It Matters?
Closing levels have barely moved, yet the average daily range is the widest since March, meaning traders push yields around within each session and then return to the same place by the close. The drop in the Bollinger spread from 80 to 24 basis points, about 70%, is a classic setup for a sharp directional move. With a December hike priced at about 90%, almost all of the tightening case is already reflected in front-end yields. That creates an asymmetry: a hawkish Fed confirms what is priced, while any hesitation could pull the 2-year sharply lower. For bond investors, the risk is skewed toward a rally in short maturities rather than a further selloff.
What’s Next?
Watch the 2-year for a close outside the 4.70% to 4.82% band, which would be the first confirmation of a breakout. The Fed statement and press conference on October 28 will matter more than the rate decision itself, given that a hold is expected. Oil’s response to reports of renewed US strikes on Iran will also shape how the bond market reads inflation risk.
Affected Tickers and Coins: ZT, ZN, TLT, SHY
Source: CNBC
