Bond Report: Long dated Treasury yields drop to lowest in more than a week as investors look ahead to November Fed meeting

What are yields doing?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
1.612%
fell 1.6 basis points to 1.618%, versus 1.634% at 3 p.m. Eastern on Monday.

The 2-year Treasury note yield
TMUBMUSD02Y,
0.445%
edged up 1.3 basis points to 0.448%, compared with 0.435% late Monday. It’s the second-highest level this year for the yield, which is up three of the past four trading days, according to Dow Jones Market Data.

The 30-year Treasury bond yield
TMUBMUSD30Y,
2.041%
fell 3.4 basis points to 2.051%, down from 2.085% on Monday afternoon.

The 10- and 30-year rates have fallen for three straight trading days, and are now at their lowest since Oct. 18, based on 3 p.m. levels.

What’s driving the market?

The yield curve — a line plotting yields across all Treasury maturities — continued to flatten, with long-dated yields falling or not gaining as much as short-dated yields. Investors and traders attributed the moves to a number of messages being sent by the bond market, including the views that Fed policy makers may not get very far in their next interest rate hiking cycle and/or the U.S. economic growth may have already peaked.

The Fed is seen as likely to announce its plan next week for scaling back, or tapering, its $120 billion in monthly bond purchases, and investors are already looking past the months-long process. They’re focused instead on when the central bank will begin raising interest rates, and have moved forward their expectations for the first hike as a result of high inflation readings.

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However, there are worries that the Fed could move more aggressively than anticipated to tighten monetary policy, at a time when economic growth could be waning. By the same token, fears of slowing growth are also contributing to the view of many that policy makers won’t be able to lift rates very far once they start.

Investors will be closely tracking economic data for signs of the underlying state of the economy which continues to recover from the pandemic. While supply bottlenecks are seen contributing to inflation worries, the backlogs are the result of consumer demand for goods that continues to run strong with help from government stimulus payments earlier this year.

In U.S. data released Tuesday, the S&P Case-Shiller’s 20-city home price index rose at annual rate of 19.7% in August. The Conference Board’s October reading on consumer confidence rose to 113.8 from a revised 109.3 in the prior month.

Data due this week includes September durable-goods orders on Wednesday, weekly jobless benefit claims on Thursday, along with the first estimate of third-quarter gross domestic product. Friday brings personal income and spending data, as well as the Fed’s favorite inflation measure — the core personal consumption expenditures price index.

What are analysts saying?

“The flattening of the yield curve is the message the market is sending suggesting the Fed will get control of inflation, ultimately, or that we could be at peak U.S. growth which in turn points to more contained inflationary pressures. A flatter yield curve signals the Fed may not be getting very far with rate hikes,” said Jack McIntyre, who helps oversee about $67 billion at Brandywine Global Investment Management in Philadelphia.

“Recent flattening in the yield curve and nominal rate rises are implying that expectations for the Fed’s rate lift-off have moved earlier and that growth expectations remain sluggish,” said David Gagnon, a San Diego-based managing director and head of U.S. Treasury trading for Academy Securities.

Via phone on Tuesday, Gagnon said that “the market is not so worried about long-term inflation versus short-run,” as indicated by the forward breakeven inflation curve, “and is more worried about growth for now as indicated by negative real yields. In the long end, demand for duration remains strong from investors and to a lessor degree central banks; however, with Fed tapering expected to start soon, this could change.”