Short maturities eased after a New York Fed official said policymakers could wait, while long bonds touched levels unseen in more than 24 years. Barclays and Mizuho disagree on how far the long end can go.
Tuesday split the Treasury market in two.
At its peak the 30-year bond yielded 5.613%, a level not seen during a trading session in more than 24 years, since June 11, 2002. Late in the afternoon it was near 5.59%, up about 3 basis points. The 10-year yield touched 5.289%, close to its 2007 peak of 5.303%, before settling back near 5.26%. The two-year note, the maturity most tied to Federal Reserve policy, moved the other way and fell about 3.5 basis points to near 4.89%.
Its decline followed remarks in Buffalo from John Williams, the New York Fed's president, who said policymakers could take their time. "With the policy action we took at our September meeting, there is no need for urgency, and we have time to gather more information," he said. Short yields had also dipped earlier in the day, just after a sharp drop in consumer confidence was released.
The shape of the curve
The result was a steeper curve. The gap between the 30-year and two-year yields was about 70 basis points late Tuesday. The spread between the 10-year and two-year was about 37 basis points, up from about 31 basis points on Monday afternoon.
Measured from its March 2 low for the year, the 30-year yield is up a full percentage point.
"Investors remain very focused on inflation and they're more worried about the fiscal deficits here in the U.S... [as well as] the amount of Treasury supply," said JoAnne Bianco, senior investment strategist at BondBloxx Investment Management. "All of those things make them think there needs to be more term premium."
Corporate supply is adding to the pressure. Paramount Skydance is preparing a $32 billion sale of investment-grade bonds to fund its purchase of Warner Bros. Discovery, adding a large block of new debt for bond buyers to absorb alongside Treasurys.
Two views on how far it goes
Anshul Pradhan, head of U.S. rates research at Barclays, argued in a note that the selloff has not yet priced a lasting rise in productivity from the artificial intelligence buildout. Markets, he wrote, "continue to assume that today's elevated neutral rate will ultimately prove cyclical rather than secular." If faster productivity growth keeps the Fed from bringing rates back down, "a repricing of long-run estimates higher to short-run ones would over time push the fair value of 30y yields to 6%," a level last exceeded in June 2000.
Alex Pelle, senior economist at Mizuho Securities, sees it differently. He rates 10-year yields as somewhere between "somewhat cheap" and "close to fair value," expects two more Fed increases rather than a move toward 5%, and attributes much of the recent weakness to technical factors and positioning rather than fundamentals. His base case is that yields eventually settle "modestly lower."
Across bond funds
The losses have spread well beyond Treasurys. Long-duration funds have taken the most damage. The iShares 20+ Year Treasury Bond ETF was down 4.4% for September through Monday, counting interest, against 2.4% for the broad Vanguard Total Bond Market ETF. High-yield funds had lost more than 2%, which would be their weakest month since 2022. The dollar index rose toward 101.6, near its highest close since June.
Stocks absorbed the move with little change. The S&P 500 and Nasdaq Composite were roughly flat in the final hour, and the Dow was down about 0.2%.
Wednesday's August inflation report and Friday's payrolls will test the split. A soft inflation print that leaves the 30-year near 5.6% would support the view that the long end is being driven by supply and term premium. A hot print that lifts the two-year back up would put Fed policy back at the center.