Treasury yields end at some of 2023’s highest levels ahead of GDP, inflation data

What happened

• The yield on the 2-year Treasury
  BX:TMUBMUSD02Y
  rose 5.4 basis points to 5.121% after accounting for new-issue levels.

• The yield on the 10-year Treasury
  BX:TMUBMUSD10Y
  climbed 11.2 basis points to 4.952% from 4.840% Tuesday afternoon.

• The yield on the 30-year Treasury
  BX:TMUBMUSD30Y
  jumped 12.7 basis points to 5.09% from 4.963% late Tuesday.

• Wednesday’s trading produced the second-highest levels for the 10- and 30-year rates of this year, based on 3 p.m. Eastern time figures from Dow Jones Market Data.

What drove markets

Intermediate- and long-term Treasury yields soared on Wednesday as bond vigilantes returned and spurred another aggressive selloff. Washington developments came into focus as Rep. Mike Johnson of Louisiana was elected as the new House speaker, capping a chaotic three-week period in which there had been no leader.

Read: Bond vigilantes are back in charge as portfolio manager puts a 10-year Treasury yield of 5.5% to 5.75% on the map

Data released on Wednesday showed that new home sales rose to a 759,000 annual rate for September, above forecasts, while the August reading was revised slightly higher. Traders are waiting for more data this week that may provide more clues about the strength of the economy ahead of the Federal Reserve’s Oct. 31-Nov. 1 policy meeting.

A reading on third-quarter GDP is set to be released on Thursday, followed by the Fed’s preferred inflation gauge, the PCE index, on Friday. The U.S. economy may have grown 5% in the third quarter — defying widespread expectations for a slowdown. Economists polled by The Wall Street Journal expect core PCE readings to come in at 0.3% for September and 3.7% on a year-over-year basis.

Markets priced in a 97.1% probability that the Fed will leave interest rates unchanged between 5.25%-5.5% on Nov. 1, according to the CME FedWatch Tool. The chance of a 25-basis-point rate hike to a range of 5.5%-5.75% by the subsequent meeting in December is seen at 27.3%, down from 36.9% a year ago.

Treasury’s $52 billion auction of 5-year notes was “weak” and produced “soft” statistics, according to Ben Jeffery of BMO Capital Markets.

What analysts are saying

“The volatile nature of market conditions has left a number of question marks regarding monetary policy as the Fed rapidly approaches its next policy decision on Nov. 1. At this point, market participants are convinced the Fed will remain on the sideline, but Chair Powell was clear that further rate hikes remain a possibility if inflation concerns remain, increasing the focus on this week’s PCE report released on Friday,” said economists Lindsey Piegza and Lauren Henderson of Stifel, Nicolaus & Co.