US Treasury yields edged lower on Monday as oil prices retreated from five-month highs, while investors assessed the latest inflation data and increasingly bet that the Federal Reserve would leave interest rates unchanged at its October meeting.
The benchmark 10-year Treasury yield fell one basis point to 5.07%, while the 30-year yield also declined to 5.42%.
Oil prices also eased early on Monday after Washington moved to relax restrictions on Russian oil supplies, although escalating attacks around the Strait of Hormuz continued to threaten global shipments and keep crude prices above $100 a barrel.
The latest move extended the bond market’s recovery after a sharp sell-off pushed yields to levels not seen in more than two decades. Treasuries recorded their strongest weekly gain since mid-February as investors stepped in following the recent surge in yields.
Treasury yields retreat from multi-decade highs
Yields on longer-dated US government bonds climbed sharply in September and continued rising this month, with the 10-year Treasury yield reaching levels last seen in 2002.
The advance intensified after fresh inflation figures showed that price pressures remained stronger than expected, raising concerns that the Federal Reserve might need to keep monetary policy restrictive for longer.
However, the bond market reversed course late last week. The 10-year Treasury yield fell 16.5 basis points during the week, while the 30-year yield also moved lower significantly.
The reversal suggests that higher yields may have started attracting buyers after making Treasuries more appealing relative to other assets.
That does not necessarily mean yields have reached a permanent ceiling. However, the recent price action suggests that elevated borrowing costs are beginning to influence investor behaviour.
Jussi Hiljanen, chief rates strategist at SEB, told Dow Jones Newswires that Treasury yields may have reached levels where “their elevated levels weigh on risk sentiment”.
The mechanism can become self-reinforcing. Higher yields increase mortgage rates and corporate borrowing costs while making equities less attractive. If tighter financial conditions begin to weaken growth expectations, investors may turn back to Treasuries, pushing bond prices higher and yields lower.
JPMorgan sees potential support for stocks
JPMorgan strategists believe the recent bond-market reversal could help equities extend their gains through the end of the year.
The strategists said Treasury yields were showing signs of becoming stretched, with bonds moving into oversold territory. A further easing in yields could reduce pressure on equity valuations and create more favourable conditions for stocks.
However, the outlook remains uncertain as persistent inflation continues to complicate the Federal Reserve’s policy decisions.
PIMCO Chief Investment Officer Daniel Ivascyn told Reuters last week that Treasury yields may not have peaked and that the Fed could still raise interest rates once or twice more.
Markets expect Fed to hold rates in October
Expectations of another rate increase this month have weakened considerably, with the CME FedWatch tool indicating a probability of more than 85% that the Federal Open Market Committee will leave borrowing costs unchanged at its next meeting.
The shift follows the latest inflation data, which showed persistent price pressures but did not prevent investors from increasingly favouring an October pause.
Markets will continue to assess incoming economic indicators for clues about the outlook for inflation, growth and monetary policy.
The US Census Bureau is scheduled to release September housing starts and new building permits data on Tuesday, providing another indication of conditions in the housing sector amid rising borrowing costs.
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