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Long dated Treasury yields post biggest quarterly rise since March as inflation worries intensify and global central banks pivot

MarketWatch logo MarketWatch 9/30/2021 Vivien Lou Chen
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BOND REPORT

Ten- and 30-year U.S. Treasury yields posted their biggest quarterly rises since March as investors’ concerns about inflation intensified and global central banks begin moving away from easy monetary policy settings.

The recent quarterly runup in market yields comes amid a month-end rebalancing of portfolios by investors and an equities selloff that sent the Dow Jones Industrial Average down by more than 500 points on Thursday.

What yields are doing
  • The 10-year Treasury note yield fell to 1.528%, compared with 1.54% at 3 p.m. Eastern Time on Wednesday, according to Dow Jones Market Data. But it rose by 8.5 basis points over the third quarter, the largest quarterly gain since March.
  • The 2-year Treasury note yield was 0.289%, versus 0.297% in the prior day’s session. It’s had the largest three-quarter gain in yield since 2018.
  • The 30-year Treasury, also known as the long bond, yield was slightly higher for the day at 2.092%, compared with 2.089% on Wednesday. It had the largest quarterly rise since March.
What’s driving the market?

September’s final day of trading turned volatile in equities as the need for investors to rebalance portfolios into month- and quarter-end collided with growing worries about a prolonged spell of U.S. inflation, among other things.

Such fund rebalancing typically entails rotating out of stocks and into government bonds, but the impact was minimal and outweighed by inflation concerns, along with the growing realization by investors that global central banks are beginning to move away from easy policy settings enacted during the pandemic.

Read: U.S. could be heading into an ‘era’ of high inflation that produces paltry, or even negative, real returns on safe assets, analyst warns

In testimony to a U.S. House Committee on Financial Services on Thursday, Federal Reserve Chairman Jerome Powell told lawmakers that the factors pushing inflation higher could last until next summer.

The economy is experiencing “a very unusual event” of supply-side restrictions, and “we expect that those will abate, that they’ll lessen, and over time inflation will come back down,” Powell said.

However, “exactly when that will happen is not possible to say,” he said. “But I would say we should be seeing some relief in coming months and over the course of the first half of next year.”

The Fed chairman, appearing alongside Treasury Secretary Janet Yellen, also said the central bank could face difficult decisions next year if inflation stays high, while unemployment remains elevated. Thursday’s comments from Powell followed his appearance on Wednesday at a discussion hosted by the European Central Bank, where he said that inflation may be more persistent than first anticipated.

Thursday’s parade of Fed speakers also included Atlanta Fed President Raphael Bostic, who said it’s time to end emergency aid for the recovering U.S. economy.

Yields have been on the rise since last week, with investors positioning for pricing pressures that could last for longer than anticipated and could lead to a more rapid rate of interest-rate increases for the central bank.

Read: Sudden realization that inflation may persist is starting to dawn on many U.S. investors

At the conclusion of the Fed’s two-day policy meeting last week, policy makers penciled in a sooner-than-expected rate increase by the end of 2022, and indicated that a tapering of their bond purchases may soon be warranted. The central bank next meets on Nov. 2-3, when it is expected to formally announce a reduction of its monthly purchases of $120 billion in Treasury and mortgage-backed securities.

Inflation hurts bonds the most of all asset classes because it erodes their fixed value, prompting investors to sell off and yields to rise.

In the political arena, Congress finally approved a short-term spending bill on Thursday to keep the federal government running through early December, though has not yet raised the federal debt ceiling.

Data releases showed U.S. jobless claims jumped to a two-month high amid a surge in California. New jobless claims paid traditionally by the states rose by 11,000 to 362,000 in the seven days ended Sept. 25, the government said.

The economy grew at a revised 6.7% annual pace in the second quarter, as the U.S. got a big jolt in the spring from government stimulus payments and coronavirus vaccines allowed businesses to reopen. The government’s third estimate of second-quarter GDP was largely in line with its prior analysis.

A measure of business conditions in the Chicago region slipped in September to its lowest level in seven months. The Chicago Business Barometer, also known as the Chicago PMI, slowed to 64.7 in September from 66.8 in the prior month — moderating from a record high of 75.2 in May.

What analysts say
  • “The recent move in rates may have been exacerbated by month- and quarter-end rebalancing, but the overall impact has been marginal,” senior market strategist Michael Reinking of the New York Stock Exchange wrote in an e-mail to MarketWatch. “The bigger factor is the market’s recognition that global central bank policy is at an inflection point, as central banks begin to unwind the extraordinary measures that were put in place during the crisis.” ”
  • “The debate over inflation has become polarized between those who expect a return to the 1970s and those who believe inflation is still dead,” said Neil Shearing, group chief economist at Capital Economics. “The reality is more nuanced and inflation outcomes are likely to vary between countries.”
  • “We think the Fed and others will deliver less tightening than priced in the coming two years and volatility rather than a straight line higher is likely for rates,” TD Securities strategists Rich Kelly and Jacqui Douglas wrote in a note Thursday.
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