The $30 trillion U.S. Treasury market is bracing for turbulence after long-dated yields broke sharply higher last week, raising doubts about the Federal Reserve's resolve on inflation. Volatility gauges and options positioning both point to more swings ahead, with traders watching this week's economic data and Friday's jobs report for the next trigger.
Long-dated Treasury yields shot higher during the final week of July, and the yield on the 30-year Treasury bond reached 5.230%, a level unseen since 2007. Some interpreted the move as the market calling Federal Reserve Chair Kevin Warsh's bluff, since the inflation rate has stayed above the Fed's 2% target for five years despite his tough talk on prices.
Yields break out of a multiyear range
The 10-year Treasury note broke higher, exiting a trading range that had held since late 2023. Doubts deepened on Wednesday, when three regional Fed bank presidents on the rate-setting committee dissented from their colleagues and voted to hike rates.
According to TD Securities' Gennadiy Goldberg, head of U.S. rates strategy: "Markets are questioning how committed the Fed is to bringing inflation to heel."
Oil slides as the yield curve compresses
Crude oil pulled back even as yields climbed, a break from the usual link between energy prices and rates. Meanwhile, crude-oil futures fell 5.44%, further weakening the correlation between oil and Treasury yields.
The break followed Warsh's postmeeting press conference, when long-dated yields jumped and short-dated yields fell. As a result, Dow Jones Market Data showed it was the largest Fed Day compression of the yield curve since 2023.
Options traders brace for more swings
The ICE BofAML MOVE Index, which tracks expected Treasury volatility, touched its highest level since May as traders rushed to hedge against further rate increases. Demand for bearish puts on the iShares 20+ Year Treasury Bond ETF also climbed, and Cboe Global Markets said one-month TLT put skew surged to its highest level since the 2008 financial crisis.
Bob Elliott of Unlimited Funds, in commentary shared with MarketWatch, questioned how much more pressure stocks and other assets can absorb before rates this high start pulling them lower.
A yen intervention and what comes next
Late last week, the Treasury Department and Fed joined counterparts in Japan in a coordinated intervention to stabilize the yen, a move likely aimed at heading off another bout of Treasury market volatility. This week brings more details on the Treasury's financing plans plus a run of economic reports, culminating in Friday's July jobs report.
Goldberg said the base case calls for no rate hike this year or next, though the odds have risen materially.
Source: MarketWatch
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