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Sept. 28, 2021, 3:56 p.m. EDT

Treasury yields hit the highest levels in months as 10-year rate pushes back above 1.5%

By Vivien Lou Chen and William Watts

A selloff in U.S. government debt, sparked by growing inflation fears, pushed Treasury yields to the highest levels in months, with the 10-year rate rising above 1.5% after briefly breaching that level in the previous session.

Federal Reserve Chairman Jerome Powell said Tuesday that some of the supply-side bottlenecks behind the surge in inflation have “gotten worse.” Meanwhile, U.S. Treasury Secretary Janet Yellen said the Treasury is likely to exhaust extraordinary measures to keep from defaulting on its debt if Congress has not acted to raise or suspend the debt limit by Oct. 18 .

What are yields doing?

  • The yield on the 10-year Treasury note (XTUP:BX:TMUBMUSD10Y) rose 5.2 basis points to 1.534%, up from 1.482% at 3 p.m. Eastern on Monday. It’s the highest level for the rate since June 25, based on 3 p.m. yields, according to Dow Jones Market Data.

  • The 2-year Treasury note yield (XTUP:BX:TMUBMUSD02Y) was 0.305%, compared with 0.28% on Monday afternoon. It was the highest yield since March 25, 2020.

  • The yield on the 30-year Treasury bond (XTUP:BX:TMUBMUSD30Y) rose 7.6 basis points to 2.07%, compared with 1.994% on Monday. It was the highest level since July 1, and the biggest one-day gain since June 21.

What’s driving the market?

Treasury yields have been rising since the middle of last week, following a Federal Reserve meeting that saw policy makers indicate they could formally lay out a plan to begin tapering monthly bond purchases in November, while also moving up forecasts for subsequent interest-rate increases.

Analysts said a sharp rise in energy prices was helping to fuel a global rise in yields, with crude prices (NYM:CL00) touching an almost three-year high and natural-gas prices soaring earlier on Tuesday. Energy shortages have led to factory disruptions in Asia and Europe, which could squeeze supplies, feeding into inflationary pressures. During a Senate Banking Committee hearing Tuesday in Washington, Powell said there’s been a mismatch between demand and supply, and “we need those supply blockages to alleviate, to abate, before inflation can come down.”

Meanwhile, Yellen said that Congress must raise or suspend the debt limit by Oct. 18. “At that point, we expect Treasury would be left with very limited resources that would be depleted quickly,” she said in an update sent to Congressional leaders.On Monday night, Republican senators blocked a bill in Congress that would have allowed the U.S. government to keep operating beyond the end of the fiscal year on Thursday, and to lift the federal debt ceiling. Democrats are scrambling to get a debt-limit increase or suspension through Congress, and are already looking ahead at options for the next time action is needed, House Speaker Nancy Pelosi said on Tuesday.

Read: What happens if the U.S. defaults on its debt?

Data released Tuesday showed the U.S. trade deficit in goods rose in August and stood near a record high, as retailers imported more consumer goods ahead of the holiday shopping season. The trade gap in goods widened 0.9% to $87.6 billion in August,  the government said.

The S&P CoreLogic Case-Shiller home price index rose nearly 20% in the year ended July, up from an 18.7 annual rate the prior month. July marked the highest annual rate of price growth since the index began in 1987. Consumer confidence fell in September to a seven-month low owing to the fast spread of delta and a bout of high inflation that’s raised the cost of new cars, appliances and other popular products.Meanwhile, Treasury’s $62 billion auction of 7-year notes (XTUP:BX:TMUBMUSD07Y) on Tuesday tailed, but produced “solid buyside demand,” said money market economists Thomas Simons and Aneta Markowska of Jefferies LLC.

What are analysts saying?

  • “Central bank policy is at the center of much of the interest rate angst,” said Michael Reinking, a senior market strategist at the New York Stock Exchange. “The key for markets right now are interest rates, and it’s more about the pace of the move higher than the absolute levels.”

  • “The U.S. rates market consensus is firmly that tapering starts in November and a first Fed hike is priced in by the end of 2022, but thereafter, the implied trajectory isn’t vertiginous and with Brent above $80 (a barrel), there’s plenty of inflation-worrying left for the markets to do,” said Kit Juckes, global macro strategist at Société Générale, in a note.

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