NEW YORK- Longer-dated US Treasury yields eased on Tuesday after the benchmark hit almost 16-year highs overnight as a bond rout simmers on concerns the Federal Reserve will keep interest rates higher for longer and the government fiscal deficit will widen.
A jump in Treasury issuance, Fitch’s credit downgrade three weeks ago and concerns China will dump Treasuries to support the yuan have added to a sell-off as investors await the Fed’s annual summit in Jackson Hole, Wyoming, later this week.
Real yields, as seen in 10-year inflation-protected Treasuries, or TIPS, have climbed almost 40 basis points so far in August and topped 2.0 percent on Monday for the first time since July 2009.
“There’s not a clear driver for this kind of move up in real yields,” said Marvin Loh, senior global macro strategist at State Street in Boston.
There are concerns whether China and Japan remain aggressive buyers of Treasuries and a stronger-than-expected growth outlook of the US economy, while inflation expectations have not changed much, Loh said.
“Why all of that comes together in two to three weeks in August? I’m not 100 percent sure. There’s a wall of worry, there are a lot of concerns. They all point to higher yields,” he said.
“It’s hard to see a catalyst that’s going change it.”
The yield on the benchmark 10-year note slipped 1.2 basis points to 4.330 percent after touching 4.366 percent early Tuesday in London, a high last seen in November 2007.
The two-year’s yield, which often reflects interest rate expectations, rose 4.5 basis points to 5.037 percent.
“With the Fed on the march, not necessarily to hike rates in September, but to keep rates higher, buyers haven’t been as willing to come in and pick up these yield levels,” said Kim Rupert, managing director of global fixed income at Action Economics in San Francisco.
“There’s almost a perfect storm against Treasuries,” she said. “With the Treasury refunding, they put it in black and white, the borrowing needs, the market gulped and said ‘Well, maybe this is not a good thing’.”
S&P Global followed Moody’s in cutting its credit ratings and outlook on multiple US regional banks on Monday, saying higher funding costs and troubles in commercial real estate will likely test the credit strength of lenders.
