10-Year U.S. Treasury Auction Yield Hits 4.683%, Highest Since Financial Crisis

The U.S. Treasury auctioned $42 billion in 10-year notes on Wednesday (12th). The stop-out yield hit 4.683%, the highest level since 2007 and a post-financial crisis peak. This was only slightly above the market yield just before the bidding closed at 1:00 PM New York time, indicating demand was marginally weaker than expected. Most U.S. Treasuries ended Wednesday with little change.

This sets the tone for Thursday’s 30-year bond auction, with markets expecting its funding yield could reach a 25-year high. Elevated inflation above the Federal Reserve’s (Fed) target, combined with an expanding fiscal deficit, continues to push up long-term Treasury yields.

Gregory Faranello, Head of U.S. Rates Trading and Strategy at AmeriVet Securities, said yields would remain difficult to lower amid massive fiscal deficits, solid economic growth, ongoing wars, and inflation above the Fed’s target.

Earlier released U.S. Consumer Price Index (CPI) data met expectations, prompting traders to scale back bets on a Fed rate hike at the September meeting. Interest rate swaps indicate about a 40% chance of a September hike, down from around 50% before the data release.

The yield on the 2-year Treasury, most sensitive to Fed policy shifts, fell by less than 2 basis points to 4.2%. However, investors still fully price in rate hikes by year-end, highlighting persistent concerns over U.S. inflation pressures.

Steve Ryder, Senior Fixed Income Portfolio Manager at Aviva Investors, believes the data is sufficient to keep September hike expectations alive, but doesn’t create urgency for immediate Fed action. He noted that policymakers may place greater emphasis on the next CPI and employment reports before deciding whether further tightening is needed later this year.

U.S. Bureau of Labor Statistics data showed that in July, core CPI—excluding volatile food and energy prices—rose 0.2% month-on-month and 2.5% year-on-year, matching the lowest annual gain since March 2021.

Weaker-than-expected July labor market performance boosted bond markets last weekend, leading traders to downgrade expectations for a rate hike this year. With the Fed’s next rate decision meeting not until September, market focus has shifted to the upcoming August inflation and employment data.

Christopher Hodge, Natixis’ Chief U.S. Economist for the Americas, said markets must continue to factor in the possibility of a surprise rate hike at every recent Fed meeting, but he still believes the Fed can narrowly avoid hiking rates.

He pointed to gradually cooling inflation toward target, a weakening consumer sector, and increasingly uncertain employment prospects as reasons the Fed might stay on hold.

The annual global central bankers’ symposium at Jackson Hole, Wyoming, at the end of the month will also be a market focal point, as investors closely watch for any signals the Fed may send on policy outlook.

Fed Chair Kevin Warsh, who took office earlier this year, has deliberately avoided giving the market clear guidance on policy path. However, Faranello believes the Jackson Hole event offers Warsh a chance to “fine-tune the inflation message.”

Brad Conger, Chief Investment Officer at Hirtle & Co., said his firm has recently been increasing positions in 20-year Treasuries yielding over 5%, based on the view that multiple forces are suppressing broad inflation, with flat real wages being the most evident factor.