10-year Treasury yield ends just shy of 5% after remarks by Fed’s Powell

What happened

• The yield on the 2-year Treasury
  BX:TMUBMUSD02Y
  fell 4.7 basis points to 5.171% from 5.218% on Wednesday. Thursday’s level is still the third-highest of this year, based on 3 p.m. Eastern time figures from Dow Jones Market Data.

• The yield on the 10-year Treasury
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  rose 8.5 basis points to 4.987% from 4.902% Wednesday afternoon. Thursday’s level is the highest close since July 20, 2007. The 10-year traded as high as 4.996% during the New York session.

• The yield on the 30-year Treasury
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  jumped 10.8 basis points to 5.101% from 4.993% late Wednesday. Thursday’s level is the highest close since July 19, 2007.

What drove markets

The 10-year Treasury yield traded within a whisker of 5% as investors continued to sell long-dated U.S. government debt on fears that robust economic data could encourage the Federal Reserve to keep interest rates higher for longer as it battles inflation.

Read: Why stock-market investors are fixated on 5% as 10-year Treasury yield nears key threshold

In remarks made on Thursday, Powell said the central bank is “attentive” to recent economic data which shows resilient economic growth and demand for labor, and that more interest rate hikes may be needed if that trend continues.

Data released earlier in the day showed that weekly initial jobless benefit claims fell to a nine-month low of 198,000 last week, defying expectations for rising layoffs amid higher U.S. interest rates. New jobless claims declined from a revised 211,000 in the prior week. Meanwhile, the Philadelphia Fed’s manufacturing activity gauge remained in contractionary territory for the second straight month in October.

Markets priced in a 97.6% probability that the Fed will leave its policy interest rates unchanged at a range of 5.25%-5.5% on Nov. 1, according to the CME FedWatch Tool. The chance of a 25-basis-point rate hike to a range of 5.5%-5.75% by January was seen at 32.8%.

Meanwhile, there are concerns that some important buyers of Washington’s debt are pulling back. Chinese investors sold U.S. assets at the fastest pace in four years in August, according to official Treasury Department data released Wednesday evening.

What analysts are saying

“Where bond yields end up relies heavily on the neutral rate, or the rate at which policy is neither restrictive nor stimulative for the economy,” said Mike Sanders, head of fixed income at Madison Investments based in Madison, Wis., which manages about $23 billion in assets. “There has been a heightened level of uncertainty regarding what this rate is. The Fed’s internal projections imply a belief that the neutral rate is between 2.50% and 3%, though there seems to be indefinite uncertainty even among Fed members.”

The bond market “has priced in a different, higher level,” Sanders wrote in an email to MarketWatch. “Current market-implied projections suggest a level above 3.50%. Some of the move higher in the implied neutral rate is due to an expectation of a soft landing. This difference in expectations translates to a wide range of outcomes for the benchmark 10-year Treasury.”

“That uncertainty has stoked the volatility in bond markets, and we do not expect it to subside any time soon. In addition, a lack of foreign demand, increased supply, and the rise in energy prices are also having an impact on long-term rates,” Sanders said.