The big news overnight is that the 10 year Treasury yield has broken above its highs from early 2014, and now sits at 3.08%.
After around three weeks of consolidating around the 3% mark, the 10 year Treasury yield has surged higher overnight – it is currently up 8 bps at 3.08%, its highest level since 2011.
The proximate trigger for the rise in yields was the release of US retail sales data, which contained some upward revisions to prior months, and an Empire manufacturing survey that showed the highest prices paid component since 2011. While the data was a bit stronger than expected, the main reason for the large move appears to be the technical break of 3.05%, the highs from early 2014, which added to selling pressure in bonds.
3.25% will probably be the next ‘line in the sand’ that the market will attempt to challenge.
The yield curve steepened from near its flattest levels since 2007, with the spread between the 2 year and 10 year bond yields widening 5bps to 50bps.
Comments overnight from Fed officials generally reinforced the notion that they would continue to progress with raising rates, but there was no clear case to accelerate the pace. Soon-to-be NY Fed President Williams noted that “inflation has just barely reached our 2 percent goal” and said that he thought the chances of two or three additional hikes this year were reasonably balanced.
Dallas Fed President Kaplan acknowledged that the Fed was “basically achieving both of our dual mandate objectives” and so it should continue moving to towards ‘neutral’.
As the Fed continues hiking we should expect discussion to intensify around what the Fed thinks that ‘neutral’ rate is. Williams said he thought the “new normal” for the neutral rate was around 2.5% (he added that he didn’t expect the fiscal stimulus to have any more than a 0.25% impact on neutral) while Kaplan put it in a range of 2.5-3%.
Of course, central banks usually raise rates above neutral if they need to slow the economy, but expectations of the neutral rate help anchor longer-term bond yields.
The market currently prices a near 40% chance of an additional third hike this year by the Fed and sees the Fed funds rate above 2.75% at the end of 2019.
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