Benchmark 10-year Treasury yield holds above 4% for a second day

By Vivien Lou Chen and Jamie Chisholm

Long-term U.S. yields traded higher on Tuesday, leaving the 10-year rate above 4% for a second day, as market participants continued to price in economic strength and some chance of no action on interest rates by the Federal Reserve next month.

What's happening

-- The yield on the 2-year Treasury BX:TMUBMUSD02Y was little changed at 3.993%, versus 4.001% on Monday.

-- The yield on the 10-year Treasury BX:TMUBMUSD10Y rose 2.7 basis points to 4.052%, from 4.025% on Monday. On Monday, it closed above 4% for the first time since July 31.

-- The yield on the 30-year Treasury BX:TMUBMUSD30Y advanced 3.1 basis points to 4.335%, from 4.304% on Monday.

What's driving markets

The 10-year Treasury yield remains above the 4% mark as market participants hold on to hopes the U.S. economy will stay in decent shape following last Friday's unexpectedly robust jobs data. Yields have also been pushed higher by concerns that a recent rally in oil prices - which took a pause on Tuesday - could revive inflationary pressures, according to Jim Reid, a strategist at Deutsche Bank.

With the recent rise in oil prices and U.S. macroeconomic data strengthening, "there were further signs that investors are pricing in more inflation risk. In fact, the U.S. 2-year inflation swap was up to 2.39% yesterday, marking its highest level in nearly 3 months, and after having briefly fallen to below 2% this time last month," Reid said in a note.

"That growing awareness of inflation risk helped drive a fresh bond selloff yesterday, as investors dialed back the likelihood of rapid rate cuts from central banks," Reid added.

Fed-funds futures traders were pricing in an 86.7% probability that the Fed will cut interest rates by 25 basis points on Nov. 7 from a current range of 4.75% to 5%, according to the CME FedWatch Tool. There was also a 13.3% chance of no rate cut on that day. Just a week ago, traders priced in a probability of a 50-basis-point cut in November at 36.8%, but that's now at zero.

In data released on Tuesday, the U.S. trade deficit sank 11% in August to a five-month low because of fewer imports of oil and new cars. Separately, New York Fed President John Williams said in an interview with the Financial Times that two quarter-point cuts by year-end is a "very good base case."

The Treasury will announce the results of a $58 billion auction of 3-year notes just after 1 p.m. Eastern time on Tuesday.Outside the U.S., a risk-off mood across European and a number of Asian bourses took hold earlier in the day after Beijing failed to deliver additional stimulus measures.

-Vivien Lou Chen -Jamie Chisholm

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10-08-24 1011ET

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