Bond markets remained the center of gravity for financial markets this week. Treasury yields advanced to their highest levels in more than two decades, even as equities briefly touched new records and crude oil fluctuated on competing signals from the Middle East.
The pressure in Treasuries intensified mid-week on two fronts. First, Wednesday’s release of the Federal Reserve’s September meeting minutes showed that most policymakers anticipated additional rate hikes would be needed to bring inflation back to target. That view was reinforced a day later by Fed Governor Christopher Waller, who said further tightening “will likely be needed” while noting there is “flexibility” about the pace.
Second, markets are pricing more into long-term yields than just Fed rate expectations. The New York Fed’s estimate of the 10-year term premium, which measures the additional yield investors demand for holding long-term bonds rather than rolling short-term paper, climbed to its highest level in twelve years. Rising U.S. government debt, political uncertainty ahead of the November midterms, and the sheer scale of supply facing the market are all contributing. The 10-year Treasury yield briefly touched 5.364% on Wednesday, its highest since 2002, before settling somewhat after a stronger-than-expected 30-year bond auction on Thursday. The 30-year itself cleared at the highest yield since 2000.
Oil prices finished the week higher after a volatile stretch. Brent dipped early on reports that regional crude exports had recovered to more than 80% of pre-war levels, but surged more than 4% on Thursday to over $104 a barrel as Iranian attacks on Strait of Hormuz shipping intensified and Houthi strikes continued in Saudi Arabia. Prices retreated early Friday after President Trump said the United States would not attack Iran before the midterm elections. Hurricane Isaias added a domestic energy wrinkle as well, disrupting oil and gas production off the U.S. Gulf Coast.
Next week’s primary focus will be September’s Consumer Price Index, due Wednesday. With yields at multi-decade highs and rate expectations shifting week to week, the CPI print will carry unusual weight for both the bond market and the Fed’s deliberations heading into year-end.
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Andrea F. Pringle
Senior Vice President
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