Treasury Yield Rises Above 5% on a Resilient U.S Economy

Long-term Treasury yields extended their climb to levels not seen since 2007 on Wednesday, with investors closely monitoring signs of resilience in the U.S. economy and the impact of rising oil prices due to heightened tensions in the Middle East.

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Here's a breakdown of what's happening in the market:

• The 2-year Treasury yield saw a modest increase of less than 1 basis point, reaching 5.217%, up from Tuesday's level of 5.212%, marking the highest close since July 6, 2006.
• The 10-year Treasury yield surged by 5.7 basis points, hitting 4.903%, compared to Tuesday's rate of 4.846%, which was the highest at 3 p.m. Eastern time since July 25, 2007.
• The 30-year Treasury yield jumped by 5.6 basis points to 5.007%, surpassing Tuesday's level of 4.951%, which was the highest closing rate since August 22, 2007. The yield also reached an intraday high of 5.014% during Wednesday morning trading in New York.

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Market drivers include inflation concerns, with oil prices making a significant upward move toward late September highs, driven by escalating tensions in the Middle East. On Wednesday, oil prices surged by 3%, with reports suggesting that Iran was calling for an embargo on selling oil to Israel.

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Recent U.S. economic data, including a robust retail sales report released on Tuesday, has indicated the resilience of the U.S. economy. This suggests that the Federal Reserve might need to maintain higher interest rates for an extended period. Economists at Morgan Stanley revised their third-quarter GDP estimate to 4.9%, up from the previous estimate of 4.5%. Additionally, the Atlanta Fed's GDPNow estimate for third-quarter GDP increased to 5.4%, up from the 5.1% estimate as of October 10.

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As for market expectations, there is an 86.8% probability, as indicated by the CME FedWatch Tool, that the Federal Reserve will leave interest rates unchanged within the range of 5.25%-5.5% on November 1. There is also a 35.1% chance of a 25-basis-point rate hike, taking the range to 5.5%-5.75%, by December.

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The Treasury is set to hold an auction of $13 billion in 20-year bonds at 1 p.m. Eastern time.

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Additionally, the Bank of Japan responded to a fresh decade-high 10-year bond yield of 0.815% by announcing unscheduled bond purchases.

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Analysts are taking note of the unexpected strength in U.S. economic data. Matthew Ryan, Head of Market Strategy at global financial services firm Ebury in London, pointed out the surprise of the positive September retail sales report. This comes after many economists, including the Federal Reserve, had warned of a potential slowdown in consumer spending and even a looming recession towards the end of the year.

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Furthermore, analysts are looking forward to an appearance by FOMC chair Jerome Powell in New York on Thursday. This event is anticipated to provide insights into the U.S. economic outlook, and futures markets are now indicating a greater than 50% chance of another FOMC rate hike by January. This has led to an upward reevaluation of U.S. Treasury yields, bringing them closer to their early-October highs.

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In summary, long-term Treasury yields are on the rise, touching levels not seen since 2007. This is primarily attributed to a combination of factors, including strong economic data, concerns about inflation, and escalating oil prices due to Middle East tensions. These developments are driving expectations for the Federal Reserve's interest rate policies and adding complexity to the global financial landscape.

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