The 10-year Treasury Yield Flirts With 5% Ahead of Powell's Remarks

On Thursday morning, Treasury yields continued their ascent, with both the 10-year and 30-year rates approaching levels not seen in 16 years, as market participants anxiously awaited insights from Federal Reserve Chair Jerome Powell.

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The 2-year Treasury yield barely inched up, rising by just under 1 basis point to 5.221% from its previous level of 5.218% on Wednesday. The Wednesday figure marked the highest closing rate since July 5, 2006, based on data from Dow Jones Market Data at 3 p.m. Eastern time.

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In comparison, the 10-year Treasury yield saw a more substantial increase of 4.8 basis points, reaching 4.950% from 4.902% during the previous Wednesday afternoon. This figure represented the highest closing level since July 25, 2007. Similarly, the 30-year Treasury yield advanced by 3.5 basis points to 5.028% from 4.993% late Wednesday, achieving its highest close since August 17, 2007.

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Market forces driving these changes can be attributed to the 10-year Treasury yield trading just a few basis points below 5%, reaching levels not observed since the summer of 2007. Investors continued to divest from long-term U.S. government bonds due to concerns that robust economic data might prompt the Federal Reserve to maintain higher interest rates for an extended period as it grapples with the challenges of inflation.

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Data released on Thursday revealed that initial jobless claims plummeted to a nine-month low of 198,000 the previous week, defying expectations for increased layoffs amid rising U.S. interest rates. New jobless claims had fallen from a revised 211,000 in the preceding week. On another front, the Philadelphia Fed's manufacturing gauge remained in contraction territory for the second consecutive month in October.

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Jerome Powell, whose speech was scheduled to begin at noon Eastern time, was anticipated to adopt a more hawkish stance in his remarks, at least in comparison to some of the speeches given by his colleagues, as economists predicted.

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Additionally, other Federal Reserve officials, such as Chicago Fed President Austan Goolsbee and Fed Vice Chair for Supervision Michael Barr, were expected to make comments on Thursday.

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Concerns also revolved around the reduced interest in Washington's debt by key investors. Official Treasury Department data released Wednesday evening revealed that Chinese investors had divested from U.S. assets at the fastest rate in four years in August.

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Prior to Powell's appearance, the market was pricing in a 93.9% probability that the Federal Reserve would maintain interest rates within a range of 5.25% to 5.5% on November 1, as indicated by the CME FedWatch Tool. The likelihood of a 25-basis-point rate hike to a range of 5.5% to 5.75% by December stood at 36.8%.

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Analysts weighed in on the situation, with BMO Capital Markets strategists Ian Lyngen and Ben Jeffery noting, "Ten-year yields are at the precipice of a 5-handle." They also remarked that "regardless of how long 5% 10-year yields persist, we're left to ponder how long higher yields can be absorbed by U.S. stocks…10-year yields spiking above 5% might be long overdue for some market participants, but perhaps not a welcome development for equity investors."

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