Fixed income

Investors in the US Treasury market are shifting their focus to owning shorter-dated government bonds, a bet that the Federal Reserve will eventually emerge victorious in its fight against inflation.

The yield on 10-year notes has climbed almost 20 basis points this week to trade just below the psychologically-important level, which may attract dip buyers but also risks triggering further selling that could spill over into global markets.

Treasuries extended an earlier decline after the announcement, with the yield on 10-year notes up about 6 basis points to 4.85% as of early afternoon in New York. They earlier hit their highest level since 2023.

With the 10-year Treasury yield hitting a 19-month high, mortgage industry executives are bracing for a tougher-than-usual end of year.

"The direction of travel is going to be higher yields from here," said Laura Cooper, global investment strategist at Nuveen. "Term premium likely has to be higher to compensate for this confluence of risks." 

After Warsh reiterated his commitment to bringing down inflation in a highly anticipated speech on Friday, swaps traders see a rate hike as more likely than not at the central bank's next decision in mid-September.

As Treasury market volatility strains IMB funding, buying a bank or insurer offers permanent capital and stronger ratings, according to the Chairman of Whalen Global Advisors.

Bond investors will zero in on Kevin Warsh's Jackson Hole speech this week, with a further selloff in long-dated Treasuries at stake as markets look for clues on the Federal Reserve chairman's response to persistent inflation and fiscal concerns.

Treasury Secretary Scott Bessent said in an interview on CNBC Thursday that he and Office of Management and Budget Director Russell Vought have been tasked with developing a fiscal plan to reduce government spending.

Just two weeks after releasing its planned schedule for buybacks this quarter, the Treasury Department on Wednesday said it's "increasing, by at least double, the size of liquidity support buyback operations" for securities dated from the 10-year to the 30-year sector. 

While domestic factors have a role in each market, fears that persistent geopolitical turmoil will make economies more prone to supply shocks and inflationary pressures are driving up yields. 

As the AI borrowing spree keeps accelerating, blowing past Wall Street's forecasts, the spillover effect is, many investors and analysts agree, playing a growing role by taxing the market's ability to absorb so much debt.

Officials expect to maintain current sales amounts for nominal interest-bearing securities — coupons — and floating rate notes "for at least the next several quarters."

A hike would establish Warsh's inflation-fighting credibility, leading some, like Citadel Securities and PGIM, to assign a higher chance of an increase this week.

The Federal Reserve is rethinking the size and scope of its holdings. Academics and industry analysts alike say liquidity reforms will be key to the process.

Federal Reserve Bank of Dallas President Lorie Logan said at an event Thursday that conducting monetary policy actions through a third party would improve efficiency and make markets stronger.

The US bond market faces a test of investor demand for longer-dated maturities, with auctions of 10- and 30-year Treasuries highlighting an otherwise light week for economic events.

AD Mortgage's head of correspondent business development writes that an Iran peace deal sparked bond rallies ahead of Wednesday's FOMC meeting.

Balance sheet reduction is a top priority of new Fed Chair Kevin Warsh. Achieving that goal means avoiding the kinds of disruptions that roiled the Treasury bond market in 2019, the last time the central bank embarked on quantitative tightening.

The ADP Research gauge of private-sector job growth in May showed an increase of 122,000, which slightly exceeded economists' median estimate.