Treasury yields jumped on Tuesday, sending the benchmark 10-year rate to a two-week high, as revived inflation angst trumped concerns about a slowing global economy.
What happened
- The yield on the 2-year Treasury BX:TMUBMUSD02Y rose 10 basis points to 4.966% from 4.866% on Friday. Tuesday’s level is the highest since Aug. 28, based on 3 p.m. Eastern time figures from Dow Jones Market Data.
- The yield on the 10-year Treasury BX:TMUBMUSD10Y climbed 9.4 basis points to 4.267% from 4.173% Friday afternoon.
- The yield on the 30-year Treasury BX:TMUBMUSD30Y rose 9.1 basis points to 4.376% from 4.285% on Friday.
- Tuesday’s levels are the highest for the 10- and 30-year rates since Aug. 22.
- U.S. financial markets were closed on Monday for the Labor Day holiday.
What drove markets
U.S. investors returned from the Labor Day holiday weekend facing news that China’s services sector activity grew at its slowest pace in eight months in August, and a gauge of business activity in the eurozone hit its lowest since November 2020.
The batch of weak economic data from China and Europe was shrugged off by fixed-income traders, with bond yields moving higher as inflation concerns held greater sway.
Brent crude futures settled above $90 a barrel after Saudi Arabia and Russia extended crude-supply cuts. Higher oil prices are adding to anxiety that inflationary pressures will be revived and force the Federal Reserve to keep interest rates higher for longer.
Markets are pricing in a 93% probability that the Fed will leave interest rates unchanged at a range of 5.25%-5.5% on Sept. 20, according to the CME FedWatch Tool. The chance of a 25-basis-point rate hike to a range of 5.5%-5.75% at the subsequent meeting in November is priced at 41.7%.
In U.S. economic updates on Tuesday, factory orders fell by 2.1% for July versus expectations for a 2.3% decline.
What analysts are saying
“The recent run-up in oil prices is already setting us up for some hotter August CPI prints, so any further gains there are going to be a fresh hurdle for central banks in their quest to get inflation back to target,” said strategist Jim Reid and others at Deutsche Bank.
“That concern was evident among sovereign bonds, which sold off mainly thanks to higher inflation expectations,” they said.
