10-year Treasury yield ends at 15-year high after Fed’s July minutes

What happened

• The yield on the 2-year Treasury BX:TMUBMUSD02Y rose 2.6 basis points to 4.978% from 4.952%. Wednesday’s level is the highest since July 6, based on 3 p.m. Eastern time figures from Dow Jones Market Data. The yield is up five of the past six sessions.
• The yield on the 10-year Treasury BX:TMUBMUSD10Y rose 3.8 basis points to 4.258% from 4.22%. The rate finished the New York session at its highest level since June 13, 2008.
• The yield on the 30-year Treasury BX:TMUBMUSD30Y advanced 4.1 basis points to 4.359% from 4.318%.
• Ten- and 30-year yields have each risen for five straight trading sessions.

What drove markets

Minutes of the Federal Reserve’s July 25-26, released on Wednesday, showed that most participants on the Federal Open Market Committee “continued to see significant upside risks to inflation, which could require further tightening of monetary policy.”

Fed funds futures traders priced in an 88.5% probability that the Fed will leave interest rates unchanged at a range of 5.25%-5.5% on Sept. 20, according to the CME FedWatch Tool. The chance of a 25-basis-point rate hike to a range of 5.5%- 5.75% at the subsequent meeting in November went up slightly after the release of the Fed’s minutes, to 37%.

Economic data released earlier on Wednesday showed that builders ramped up construction of new homes in July, with housing starts rising to a 1.45 million annual pace.U.S. industrial output was up 1% in July after a revised 0.8% decline in the prior month.

Over in Europe, there was somewhat better news on inflation from the U.K., where headline annual consumer price growth eased to 6.8% in July, down from the 7.9% increase recorded for the prior month. However, core inflation and faster wage growth are keeping pressure on the Bank of England. The 10-year gilt yield BX:TMBMKGB-10Y rose 5.6 basis points to 4.647% as the market continued to price in the risk of policy makers raising interest rates to 6% this cycle.

What analysts are saying

Referring to the theoretical level of the fed funds rate that is neither accommodative nor restrictive, Mike Sanders, head of fixed income at Madison Investments, which oversees $22.9 billion, said that “the market is expecting a higher neutral rate than it did just a few months ago.”

“The Fed has signaled a 2.5-3% long-term neutral rate, and now the market is higher than that,” Sanders wrote in an email. “And if you assume a normal curve environment and the Fed is not able to cut interest rates down to their long-term neutral target, it could imply a 10-year rate of 4.5% or higher.”

“In our view, inflation is going to be stickier long-term, and getting from 3% to 2% inflation will be the Fed’s most difficult task. We still think the economy will slow in the back half of this year and the job market will loosen. We’ll be watching for fears of a 2024 slowdown to pick up in the final months of 2023.”