US 10-year Treasury yield tumbles as Treasury steps in to calm bond market
- The US 10-year Treasury yield falls to 4.651% after reaching 4.712% earlier on Wednesday.
- The US Treasury doubles the size of some long-dated debt buyback operations to support market liquidity.
- Investors now await the Fed Minutes and a 20-year bond auction, while inflation risks remain elevated.
The US 10-year Treasury yield declines sharply on Wednesday, trading at 4.651% at the time of writing after reaching an intraday high of 4.712%. The move follows a surprise announcement from the United States (US) Department of the Treasury that it will double the size of its liquidity-support buyback operations for longer-dated securities.
The US Treasury says the size of buyback operations for nominal coupon securities in the 10-year to 20-year and 20-year to 30-year sectors will increase from $2 billion to at least $4 billion per operation. The changes will be effective from September 9 through November 4. The announcement follows a sharp increase in long-term borrowing costs, driven in part by concerns over government deficits, inflation and sovereign debt supply.
The reaction is particularly pronounced at the long end of the yield curve. The US 30-year Treasury yield falls sharply after reaching its highest level since 2007 on Tuesday. The decline spills over into the 10-year yield, suggesting investors welcome Washington's willingness to intervene to ease strains in the bond market.
However, the longer-term impact of the measure remains uncertain. Gennadiy Goldberg, head of US rates strategy at TD Securities, says the decision represents the first of several potential measures the Treasury could take to support the long end of the curve. According to Goldberg, a more permanent solution could involve reducing the size of long-dated bond auctions.
Jeremy Stretch, head of G10 FX strategy at CIBC, also notes that the move shows the US Treasury recognizes the pressures affecting the bond market and is prepared to adjust policy to contain them.
The intervention also contributes to weakness in the US Dollar (USD), as falling yields reduce some of the currency's interest-rate support. Attention now turns to the Minutes of the latest Federal Open Market Committee (FOMC) meeting, due later on Wednesday. Investors will look for signs that some Federal Reserve (Fed) officials are considering another interest-rate hike after Fed Chair Kevin Warsh refrained from providing clear forward guidance on the path of monetary policy at his latest press conference.
Markets will also monitor Wednesday's 20-year US Treasury auction. Strong demand could reinforce the decline in yields, while a disappointing auction could quickly revive concerns about investor appetite for long-dated US government debt.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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