Michael Mackenzie and Liz Capo McCormick

Mon, August 21, 2023 at 8:20 AM PDT·3 min read

(Bloomberg) — The US bond-market selloff resumed Monday, driving 10-year yields to a 16-year high, as the persistently resilient economy has investors positioning for interest rates to remain elevated even after the Federal Reserve winds up its hikes.

The moves pushed up yields on typical Treasuries as well as those that provide extra payouts to cover inflation, signaling that investors are bracing for the risk that monetary policy will remain elevated.

The yield on 10-year inflation-protected Treasuries on Monday pushed over 2% for the first time since 2009, extending its ascent from year-to-date lows near 1%. Not long after, the yield on 10-year Treasuries without that protection surpassed October’s peak, climbing as much as 9 basis points to 4.35%, a level last seen in late 2007.

The jump extends the major shift that has raced through the bond market over the past two weeks as the odds of a recession recede and large federal budget deficits increase the supply of Treasury debt. That’s driven investors to sharply push up rates on longer-term debt, which had tumbled deeply below short-term ones on fears that the economy was poised for a contraction.

“The move higher across the curve over the last few weeks has really been all on the real-yield side,” said Zachary Griffiths, senior fixed-income strategist at CreditSights, citing a “higher Fed policy rate or better growth expectations, with little shift in breakeven inflation expectations.”

The 10-year real — or inflation-adjusted — yield has risen sharply from around 1.5% in mid-July and just above 1% earlier this year. On Monday, the 30-year real yield rose 6 basis points to 2.15%. Treasury market volume was 75% of usual activity and was potentially exacerbating the price action.

The movements have fanned expectations that the US bond market is closing the door on the post-financial crisis era of ultra-low rates, anticipating that the Fed will hold interest rates elevated for longer than markets had expected. The movement has come even as the swaps market is still pricing in that the Fed is likely done with its rate hikes and will be easing policy next year.

“The continued better-than-expected economic data has made it like we are almost contemplating a new reality that we haven’t had for quite some time, where rates could potentially be quite higher for quite longer,” Griffiths said. “That’s the big thing driving real yields.”

Bond investors are bracing for upcoming auctions of 20-year bonds and 30-year TIPS, that have smaller investor bases than other Treasury products. Demand will be closely followed for any hint the current rout is nearing an end, or perhaps has further room to run.

The debt sales arrive before the Fed’s annual gathering at Jackson Hole, with the market anticipating a hawkish tone from Chair Jerome Powell when he speaks Friday.

“The technicals are with the bond bears,” said Andrew Brenner, head of international fixed income at NatAlliance Securities. But, he added, “in a slow August, illiquid holiday week, they have nothing to fear as the world expects Powell to be hawkish.”

–With assistance from Elizabeth Stanton.