Treasury Yields on Track to Reach a 12-year High

Continuing their upward trajectory, long-dated U.S. yields displayed further gains on Thursday, propelling the 30-year rate towards a milestone not reached in 12 years. This trend reflects traders' anticipation that a robust economy will prompt the Federal Reserve to enact additional interest rate hikes.

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Market Developments:

• The yield on the 2-year Treasury (BX:TMUBMUSD02Y) declined by 5.1 basis points, settling at 4.927% from Wednesday's figure of 4.978%.
• Meanwhile, the yield on the 10-year Treasury (BX:TMUBMUSD10Y) advanced by 1.6 basis points to reach 4.274%, compared to Wednesday's 4.258%. Notably, this marked the highest point since June 13, 2008, as indicated by data from Dow Jones Market Data at 3 p.m. On Thursday, the rate was on track to achieve its most elevated closure since December 26, 2007.
• Similarly, the yield on the 30-year Treasury (BX:TMUBMUSD30Y) increased by 3.2 basis points, reaching 4.391% from the previous day's 4.359%. This trajectory had the 30-year rate headed towards its highest finish since July of 2011.

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Driving Forces in the Market:

• During Thursday's session, the 10-year Treasury yield briefly surged above 4.31%, a level not seen since the global financial crisis of 2007-2008. Simultaneously, the 30-year rate was poised to establish a 12-year pinnacle. This pattern emerged in response to the resilient economic indicators, suggesting that central banks might need to implement further interest rate adjustments to contain inflation.
• The release of the minutes from the recent Federal Reserve policy meeting on Wednesday underscored the ongoing concern among policy makers regarding the persistence of inflation and the potential requirement for additional interest rate hikes.

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Market Sentiments and Probabilities:

• Despite these developments, market sentiment implies an 86.5% likelihood that the Federal Reserve will maintain interest rates at a range of 5.25%-5.5% during the September 20 meeting, according to the CME FedWatch Tool. Additionally, there is a 37% probability of a 25-basis-point rate hike to a range of 5.5%-5.75% during the subsequent November meeting.

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Economic Indicators:

• Notable economic updates on Thursday included a decrease of 11,000 initial jobless benefit claims to 239,000 in the past week, reflecting a minimal level of layoffs. Additionally, the Philadelphia Fed manufacturing gauge for August exhibited its first positive reading in a year.

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Analyst Perspectives:

• BMO Capital Markets strategists Ben Jeffery and Ian Lyngen noted that 10-year yields "reached 4.31% overnight as the selloff continues and we expect today’s preoccupation in the Treasury market will be monitoring the cycle high yield print at 4.335% from October of last year." They further highlighted the increasing likelihood of surpassing this threshold and emphasized that trading with limited conviction in close proximity to significant technical levels can trigger significant price responses, especially given the absence of substantial economic data until late August.

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