The two-year note fell further, about 10 basis points, as a second member of the Fed's leadership group signaled no rush to raise rates again. Selling shifted toward French, Italian and Greek debt.
The first trading day of the fourth quarter began where the third ended, with Treasury yields at levels last seen in 2002. It did not stay there.
The 10-year Treasury yield rose to about 5.34% in the morning, its highest since April 2002. The 30-year bond reached about 5.68%, its highest since July 2002. Both followed a jump in oil prices and a string of firm U.S. data: jobless claims below forecasts, a factory survey showing a surge in prices paid, and a 0.9% rise in August construction spending.
By midafternoon the move had reversed. The 10-year was near 5.24%, down about 5 basis points on the day and roughly 10 below its morning high. The 30-year was near 5.61%. The two-year note, the maturity most sensitive to expected Fed policy, fell hardest. After touching 4.91% early, it dropped to about 4.80%, a decline of about 10 basis points.
A sorting among governments
Traders described a market picking among sovereign borrowers rather than selling all of them. Treasurys and German Bunds rallied. Debt from France, Italy and Greece went the other way. Hedge funds were being forced to unwind trades that amounted to bullish bets on French debt, traders said, which added to the swing.
The reversal had no single trigger. "It's getting a little bit messy in markets," said TD Securities' Gennadiy Goldberg, who runs U.S. rates strategy at the firm.
The Fed's leadership
The two-year had already dropped sharply by late morning, without an obvious catalyst. Vice Chair Philip Jefferson spoke in the early afternoon at the University of Virginia, and his remarks pointed the same way. "Since our September meeting, yields across the term structure have increased further, a sign that investors are reassessing the evolving macroeconomic landscape," he said. "My colleagues and I will need to come to our own judgment, which may take more time."
That echoed Tuesday's message from John Williams, president of the New York Fed: "no need for urgency" in following up September's quarter-point increase. With Chairman Kevin Warsh, the two make up the Fed's informal three-person leadership group. Two of its three members have now signaled patience ahead of the Oct. 27-28 meeting.
Jefferson did not sound relaxed about prices. Inflation is "too high and has exceeded" the Fed's 2% target "for more than five years," he said, and he named energy as the predominant factor.
Shape of the curve
Because short yields fell about twice as far as long ones, the gap between the 10-year and two-year widened by about 4 basis points to roughly 44. That is a steeper curve built on falling short rates, the pattern bond traders associate with reduced expectations for near-term tightening.
The Treasury also ran a buyback of up to $6 billion in bonds maturing in 10 to 20 years at 1:40 p.m. The program's cap was raised last month from $2 billion. Offers at the most recent long-end operation totaled $10.47 billion, against $20 billion to $30 billion in earlier rounds.
The quarter behind it
The 10-year rose more in the third quarter than in any quarter since 1994. Thursday's retreat took it back only to roughly where it stood on Wednesday morning.
President Trump added a fiscal note to the morning. In an interview published Thursday, he said "certain levels of inflation" could help pay down the national debt "very rapidly." Long-bond investors have long worried about a government that tolerates higher prices to shrink what it owes.
What settles it
Friday's September payroll report is the next input. A strong number that sends the two-year back above 4.9% would undercut the leadership's go-slow message in market pricing. A soft one that leaves the 10-year above 5.2% would point to pressure on long bonds that does not depend on the Fed.