- Treasury yields rose in Asian trading on Wednesday ahead of the Federal Reserve’s decision, with the two-year yield up 1.9 basis points to 4.755% and the 10-year up 3.3 basis points to 5.025%, according to Tradeweb. That leaves the gap between the two at roughly 27 basis points (Lumida calculation).
- Money markets priced a 91% probability that the Fed leaves rates unchanged, according to LSEG, while a hike is almost fully priced for December. Amundi’s Alessia Berardi said “patience should not be confused with complacency,” arguing the Fed “still has accommodation to remove.”
- Beyond the Fed, bond investors are focused on the Treasury’s quarterly refunding announcement next week. Earlier in October, the 10-year and 30-year yields surged to 24-year highs, so any sign the Treasury will cut long-end issuance to reflect weaker demand will be closely watched.
- Deutsche Bank strategists say holdings data show “a retrenchment in demand for long-dated Treasurys,” driven by a shrinking pool of buy-and-hold portfolios and a preference for shorter maturities. With the average maturity of debt near historical highs, they see “a compelling case for more proactively shortening the maturity profile of future issuance.”
What Happened?
Yields on US government debt moved higher in Asian hours as investors positioned for the Fed’s announcement later Wednesday. The two-year yield rose to 4.755% and the 10-year to 5.025%, according to Tradeweb, and LSEG data showed a 91% probability of no change in rates. Amundi, in line with the market, expects the Fed to hold. Deutsche Bank strategists said the Treasury’s questionnaire to primary dealers, which asked about structural changes in investor demand and expected auction sizes, was an important step toward adjusting future issuance.
Why It Matters?
Who buys long-dated Treasuries, and at what price, has become one of the central questions for bond and equity investors alike, because the 10-year yield anchors mortgage rates, corporate borrowing costs and stock valuations. If the Treasury leans toward shorter-dated bills and notes, it could ease supply pressure at the long end, where yields recently hit 24-year highs. The trade-off is more frequent refinancing, which increases the government’s exposure to the Fed’s rate path at a time when markets expect a December hike.
What’s Next?
The Fed decision comes first, but next week’s refunding announcement could matter as much for long bonds. Investors will look for any change in the guidance on coupon auction sizes and any signal that the Treasury is responding to dealer feedback on weaker long-end demand. Amundi’s Berardi noted that the labor market “now looks less strong,” but said the inflation outlook has not changed, keeping pressure on yields.
Affected Tickers and Coins: TLT, IEF, SHY
Source: WSJ
