The losses in the US Treasuries market intensified on Wednesday as robust economic data and a weak auction drove yields across most maturities to the highest levels in almost two decades.
Higher oil prices sparked the declines earlier in the session, fanning worries around elevated inflation and punishing European government debt as well. Releases showing stronger-than-forecast US manufacturing and services activity accelerated the slide, which then picked up speed as a five-year Treasury auction drew surprisingly dim demand.
The auction results pushed the yield on five-year US notes above 5% for the first time since 2007, leaving the two- and three-year maturities the only coupon-bearing tenors below that milestone level. Thirty-year yields surged closer to their highest since 2004. The selloff spilled over into stocks, with the S&P 500 Index dropping almost 1% at one point.
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"You don't want to step in front of the freight train today," said Sean Simko, head of fixed-income investment management at SEI Investments. "You're seeing the trifecta — stronger economic data, supply pushing the five-year to levels we haven't seen in years and the view that inflation is sticky globally."
The economic data and the jump in oil prices amid the standoff in the Middle East led traders to boost bets on further Federal Reserve policy tightening. Officials lifted borrowing costs last week for the first time in three years, to a range of 3.75% to 4%, a move Chairman Kevin Warsh said removed a "
Swaps now fully reflect three quarter-point hikes over the next year, with significant hedging for a fourth increase. If realized, that would take the central bank's target rate into a range of 4.75% to 5%.
"Pressure is starting to build up on the short end of the yield curve," said Christophe Boucher, CIO of ABN AMRO Investment Solutions. Wednesday's economic data will allow the Fed to "double down" on its hawkish stance, he said.
Weak Auction
The early bond losses set the stage for the afternoon's $70 billion five-year sale, which came in at the highest auction yield since 2006.
The 5.033% yield required to clear the auction was more than three basis points above the expected level ahead of the bidding deadline. By that measure it was the second-worst five-year auction in data recorded since 2018, exceeded only by the result in June 2022 after the first of the Fed's several jumbo 75 basis point rate hikes.
The rate on the maturity surged as much as 20 basis points on Wednesday. The yield surpassed the high of 4.99% seen in 2023, at the peak of the Fed's hiking cycle to tame surging inflation.
Meanwhile, the benchmark 10-year rate rose almost 17 basis points to 5.13%, the highest since 2007. The 30-year yield traded at about 5.4%, the highest since 2007, and within about 4 basis points of the highest level since 2004.
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Policymakers have become increasingly worried about inflation that hasn't retreated to their 2% target in five and a half years, with some warning of price pressures that appear to be persistent as international tensions keep energy prices elevated. That's against the backdrop of a robust US labor market.
The bond selloff raises the stakes for the Treasury Department's expanded buyback program, announced in mid-August after long-term yields climbed to multiyear highs that have since been exceeded. The second operation under the expansion, targeting debt maturing in 20 to 30 years, is set for Thursday.
Benchmark 20- and 30-year yields added to their climb after the announcement that the buyback target — which officials previously had said would at least double to $4 billion — would be $6 billion, the same as the first expanded operation on Sept. 10.
