Treasury yields climb to one-week highs after Fed officials talk tough about rate hikes Bond Report

By Vivien Lou Chen and Jamie Chisholm

The policy-sensitive 2-year Treasury yield rose back above 4.2% on Thursday, reaching a one-week high along with its 10- and 30-year counterparts, as Federal Reserve officials continued to reiterate the need for higher interest rates.

What happened

The yield on the 2-year Treasury /zigman2/quotes/211347045/realtime BX:TMUBMUSD02Y +0.70% rose 9.9 basis points to 4.247% from 4.148% on Wednesday. The 2-year yield is up 351.7 basis points for the year, according to Dow Jones Market Data.
The yield on the 10-year Treasury /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +0.34% advanced 6.6 basis points to 3.823% from 3.757% on Wednesday afternoon.
The yield on the 30-year Treasury /zigman2/quotes/211347052/realtime BX:TMUBMUSD30Y +0.29% climbed 2.7 basis points to 3.792% from 3.765% as of late Wednesday.
Thursday’s levels are the highest for the 2, 10- and 30-year yields since Sept. 27, based on 3 p.m. Eastern time data.

What drove markets

Bond yields advanced after Federal Reserve officials continued to stress that higher borrowing costs are needed to curb inflation running near 40-year highs. On Thursday, Neel Kashkari , head of the Fed’s regional bank in Minneapolis, said it’s too early for the central bank to think about a pause in interest-rate hikes because there’s little sign that inflation has peaked.His remarks came a day after his colleague, San Francisco Fed President Mary Daly, was asked about futures markets pricing in interest rate cuts next year and said “I don’t see that happening at all.” Similarly, Atlanta Fed President Raphael Bostic said the Fed should get its benchmark rate target to between 4% and 4.5% by the end of this year, “and then hold at that level and see how the economy and prices react.”Recent U.S. economic data — such as Wednesday’s ADP employment report and the ISM services index — have come in stronger than expected, leaving policy makers with enough room to deliver more aggressive rate hikes. Meanwhile, hopes for a Fed pivot are being dashed and morphing into a sense of dread within financial markets.

Markets are pricing in a 77% probability that the Fed will raise interest rates by another 75 basis points to a range of 3.75% to 4% on Nov. 2. The central bank is also mostly expected to take its fed-funds rate target to between 4.5% and 4.75%, or higher, by March, according to the CME FedWatch tool.

The next several days bring important data that investors expect might further impact the Fed’s thinking. The nonfarm payrolls report for September is due on Friday, while producer and consumer prices data will be published next Wednesday and Thursday.U.S. data released on Thursday showed jobless claims jumping to a five-week high of 219,000. The number of people who applied for unemployment benefits last week rose by 29,000 in a possible sign of rising U.S. layoffs. Economists polled by The Wall Street Journal had expected new claims to total 203,000 for the seven days ended Oct. 1.

What analysts are saying

“Stubbornly elevated costs have kept policy makers on a firm policy pathway to higher rates,” said Lindsey Piegza and Lauren Henderson of Stifel Nicolaus & Co.September’s 75-basis-point hike by the Fed was the third consecutive move of that size, bringing the total amount of rate hikes so far to 300 basis points, and “Fed officials have been clear more tightening is still needed to reinstate price stability,” they wrote in a note.

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