#Bond Report: Ten-year Treasury yield breaches 1.45% to hit highest level since July amid parade of Fed speakers

What Treasury yields are doing

• The 10-year Treasury note
  TMUBMUSD10Y,
  1.459%
  yields 1.459%, versus 1.408% at 3 p.m. Eastern Time on Thursday. It’s the highest level since July 1.

• The 30-year Treasury bond rate
  TMUBMUSD30Y,
  1.986%
  was at 1.987%, up from 1.923% a day ago.

• The 2-year Treasury note
  TMUBMUSD02Y,
  0.283%
  was yielding 0.274%, a new 52-week high, compared with 0.259% on Thursday.

• For the week, the 10-year rose 9 basis points for the largest one-week gain since March 19, based on 3 p.m. levels, according to Dow Jones Market Data. The 2-year climbed 5 basis points on the week, the biggest weekly gain since June 18. Meanwhile, the 30-year rate advanced 7.8 basis points this week, posting the largest one-week gain since June 25.

What’s driving the market?

Yields rose on Friday as bond traders continued to digest the likelihood that the Federal Reserve will start to pull back on its quantitative easing program soon.

In addition to saying she wants policy makers to start tapering in November and end sometime before next June, Cleveland Fed president Mester also said she sees the first interest rate hike coming by the end of 2022.

Meanwhile, Esther George of the Kansas City Fed, said during a virtual speech that the U.S. economy is not going to return to “normal” anytime soon. The pandemic will leave behind permanent economic changes and might even significantly alter the manner in which the central bank sets U.S. interest rates, according to George.

Fed Chairman Jerome Powell spoke separately at a Fed event on Friday, saying he’s never seen an economy that combines so many reports of labor shortages with so many unemployed workers.

The string of speakers comes after the Fed set the stage on Wednesday for a formal announcement of tapering at the next central bank meeting in November, which could see reductions of the monthly purchases of $80 billion in Treasurys and $40 billion in mortgage-backed securities kick off by December, especially if the labor market maintains its trajectory of improvement from the COVID-19 pandemic.

Treasury yields have been climbing since Wednesday but until Friday, the move up in yields had been restrained by the view that the Fed will continue to make substantial purchases in debt and won’t move quickly to raise interest rates, which currently stand in a 0% to 0.25% range.

A projection of interest rate increases by Fed members on Wednesday, known as the dot plot, pointed to a sooner-than-expected rate increase for 2022, but Powell said in a Q&A that the so-called dot-plot of interest rates shouldn’t be used as a predictive tool of where rates will end up.  

In economic data released on Friday, sales of new homes in the U.S. rose in August, as the market for newly-constructed buildings continued to show signs of stabilization after months of declines. U.S. new-home sales increased 1.5% to an annual rate of 740,000, the government said Friday. The median forecast of economists polled by MarketWatch was for an annual rate of 720,000 for August.

What analysts are saying

“ A bearish repricing during October is very much in keeping with our view that investors will attempt to redefine the upper bound of the trading range and with 1.42% 10s now successfully breached, the next target range is 1.55% to 1.60%,” BMO Capital Markets strategists Ian Lyngen and Benjamin Jeffery wrote in a daily research note.