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Treasury yields finished near their highest levels since 2006-2011 on Friday, while posting their third straight weekly advances, as traders incorporated the Federal Reserve’s higher-for-longer theme in interest rates.
What happened
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The yield on the 2-year Treasury
BX:TMUBMUSD02Y
slipped 2.5 basis points to 5.123% from Thursday’s level of 5.148%, which was its highest close since July 18, 2006, based on 3 p.m. Eastern time figures from Dow Jones Market Data. For the week, the 2-year rate is up 9.3 basis points. It has jumped 25.7 basis points over the past three weeks. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
fell 4.1 basis points to 4.438% from Thursday’s level of 4.479%, which was ot highest since Oct. 18, 2007. The 10-year yield is up 11.7 basis points this week and 26.5 basis points over the last three weeks. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
dropped 2.9 basis points to 4.521% from Thursday’s level of 4.55%, which was the highest level since April 13, 2011. The 30-year rate rose 11.1 basis points this week and is up 23.6 basis points over the past three weeks.
What drove markets
On Friday, senior Fed officials reiterated that the U.S. central bank might not be done raising interest rates, underscoring their higher-for-longer mantra.
While policy makers held the fed funds rate target unchanged at between 5.25%-5.5% on Wednesday, they penciled in one more 25-basis-point hike by December. The Fed’s interest-rate projections also signaled that borrowing costs are likely to be cut in 2024 by less than previously thought.
Read: ‘The world has changed’ as investors absorb highest Treasury yields in more than a dozen years
In Friday’s data releases, a pair of S&P surveys showed the U.S. economy losing some momentum. The S&P flash U.S. services-sector index slipped to an eight-month low of 50.2 in September. Meanwhile, the manufacturing-related index rose slightly to 48.9, but signaled further deterioration in performance across that sector.
See: Economy loses momentum toward end of summer, S&P surveys show
Outside the U.S., the Bank of Japan kept the parameters of its yield curve control program intact on Friday, and maintained a pledge to add stimulus if needed.
What analysts are saying
On Thursday, a day after the Fed’s policy announcement, a “storm” in U.S. bond markets evolved “into a hurricane,” inflicting deep wounds on riskier assets such as stocks, said Marios Hadjikyriacos, senior investment analyst at XM, a Cypress-based multi-asset brokerage.
“When yields climb with such force, it has repercussions for every other asset class. Since yields are essentially market-determined interest rates, a move higher incentivizes investors to increase their allocation to cash and decrease their exposure to riskier plays like equities. This dynamic was on full display yesterday, with the S&P 500 losing 1.6% of its value as yields charged higher,” the analyst wrote in a note on Friday.
“With a deluge of supply set to hit the bond market next quarter while the Fed retains a stance of higher interest rates for longer, the upward pressure on yields could persist,” Hadjikyriacos said.
