Insights

US Treasuries 

• The 10-year Treasury yield is currently 4.97%, just 2 basis points lower since last Monday morning (but that’s after the previous week’s 21 basis point increase). This past week, 10-year bonds traded in a 12-basis point range (4.92% - 5.04%).  

• 2-year Treasuries are at 4.73% this morning, 8 basis points higher since last week (after a 28 basis point move higher during the previous week).  

Trading Recap 10-year Treasuries largely tracked the movement in crude oil prices for most of the week, with a notable divergence emerging on Friday.  Early in the week, with Brent crude oil trading at the high-end of the range ($105 and $110/barrel), 10-year Treasury bonds traded between 4.97% and 5.04%.  After the Fed decision to raise the overnight Fed Funds rate by 0.25% on Wednesday, 10-year bond rates moved again to the high end of the range (5.04%). On Thursday, 10-year bonds rallied down to 4.93%, along with Brent crude oil trading as low as $102/barrel. Friday broke the pattern; 10-year Treasuries jumped 7 basis points on the day to 5%. Despite Brent crude remaining on the lower end of the range at $102-$103/barrel, Treasuries sold off across the entire yield curve (7-10 basis points higher on shorter and intermediate term bonds). Market participants largely attributed the move on Friday to growing expectations that the Fed will need to implement additional rate hikes later this year to contain persistent inflationary pressures. This morning, the 10-year yield is down to 4.97%, lower by 3 basis points since Friday’s closing level, reflecting the improvement in Brent crude oil prices over the weekend, back to $101. 

Last Week’s Economic Data 

The economic data last week was a mixed picture (and overshadowed by the Fed rate decision and hawkish dot plot). The strong Retail Sales print and tight labor market (Jobless Claims) both pointed to a resilient economy. Offsetting these were weaknesses in manufacturing and housing indices.  

• Empire Manufacturing Index (September): The Empire Manufacturing Index printed at 7.6, well below the consensus estimate of 15 and the prior month's reading of 20.6, a sharp miss and deceleration that signals softening factory activity in the New York Fed district 

• New York Fed Services Business Activity (September): The NY Fed Services index printed at -8.7, significantly below the consensus of -2.2 and the prior reading of 0.5.  

• Import Price Index MoM (August): The Import Price Index for August rose 0.7% month-over-month, above the consensus estimate of 0.5% and a reversal from the prior month's revised -0.3%.  

• Export Price Index MoM (August): The Export Price Index for August printed at +0.6% month-over-month, same as the consensus estimate. 

• Retail Sales MoM (August): Retail Sales for August printed at +1.2% month-over-month, well above the consensus estimate of +0.8% and a strong rebound from the prior month's revised -0.5%.  

• NAHB Housing Market Index (September): The NAHB Housing Market Index for September printed at 32, below the consensus of 34 and the prior reading of 35.  

• Philadelphia Fed Business Outlook (September): The Philadelphia Fed Business Outlook printed at 37.8, above the consensus of 32.1 but well below the prior month's 47.4.  

• Weekly Initial Jobless Claims (Week Ended September 12): Initial Jobless Claims for the week ending September 12 printed at 196K, below the consensus of 207K and the prior week's 206K.  

• Housing Starts (August): Housing Starts for August came in at 1.275 million annualized units, below the consensus of 1.32 million. 

• Building Permits (August Preliminary): Building Permits printed at 1.394 million annualized units, below the consensus of 1.408 million.  

• Pending Home Sales MoM (August): Pending Home Sales came in at +0.3% month-over-month, higher than the consensus of -0.1% and improving from the prior month's revised -2.6%.  

• Industrial Production MoM (August): Industrial Production printed flat at 0.0%, below the consensus of +0.3% and the prior month's +0.2%.  

• Manufacturing Production MoM (August): Manufacturing Production declined -0.3%, well below the consensus of +0.3% and a reversal from the prior month's +0.2%.  

• Capacity Utilization (August): Capacity Utilization held steady at 76.3%, in line with the prior month's 76.3%.  

• Conference Board Leading Index (August): The Conference Board Leading Index declined -0.1%, below the consensus of +0.1% and a reversal from the prior month's +0.2%. 

Fed Monetary Policy  

After the FOMC meeting last Wednesday, Federal Reserve voted unanimously to raise the Fed Funds rate by 0.25% and signaled with the dot plots an additional 0.25% hike later this year.  Both Fed Chairman Warsh and the FOMC statement cited persistent inflation pressures driven by geopolitical events (aka the Iran war and the price of crude oil). This is the first hike in rates since July 2023.  

Link to Fed Chairman Warsh press conference: The Fed - Live Video 

In the post-rate decision press conference, Fed Chair Kevin Warsh commented that the rate hike reflected the FOMC committee’s views of:  

• The strength of the economy (with the labor market at or near full employment and production in excess of 2%), 

• Inflation reads over the summer which indicates that more than 60% of the components to the indices (CPI, PPI and PCE) are running in excess of 3%, 

• The Iran war and crude oil prices. While not something that the Fed can influence directly, the Fed views a rate hike as helping to limit the 2nd and 3rd tier inflation effects of the surge in oil prices.   

Fed Chair Warsh does not give forward guidance (nor did he contribute to the Summary of Economic Projections and dot plot projecting the Fed Funds rate. The FOMC’s median dot plot (without Warsh) indicates another ¼ point rate hike later this year, and rates holding steady throughout 2027 with a rate cut in 2028 and 2029. The median dot plot of the Fed funds rate in the long run is projected at 3.25% (0.1875% higher than previously projected).    

Five Fed officials are scheduled to speak publicly this week and are likely to give us some insight as to what lies ahead - John Williams, Beth Hammack, Anna Paulson, Thomas Barkin and Austin Goolsbee. 

The Fed funds rate is currently at 3.88% (target range 3.75% - 4%). The bond market, by the shape of the yield curve and Fed futures pricing, is implying a 53% chance of a ¼ point rate hike at the FOMC meeting on October 28th. The yield curve implies that the Fed will raise rates a 1/4 point at the December 9th meeting and two more ¼ point hikes in 2027. 

My Take on Longer Term Yields 

10-year yields have moved some 22 basis points over the past two weeks and are now at or above 5%. It’s never a good idea to stand in front of a moving train, but I expect the 5% yield to attract demand and allow bond yields to stabilize. We need to keep a focus on developments in Iran and crude oil prices. The past few weeks have demonstrated a fairly strong linkage between rising crude prices, resulting in concern about inflation pressure and in turn higher yields on longer-term bonds. The Fed decision last week and the hawkish dot plot is also weighing on bond yields along the entire yield curve. In the near term, higher yields on the short and intermediate range will require long-term yields to move higher as well as incentivize investors to take on the duration term risk. However, we are likely to see the yield curve flatten and long rates stabilize and ultimately benefit from a hawkish, independent Fed that is focused on price stability and bringing the inflation rate back down to 2%.    

This Week’s Economic Data 

This week’s economic calendar is relatively light on hard data, with the key releases being September flash PMI surveys on Wednesday, Weekly Jobless Claims and New Home Sales on Thursday, and August Durable Goods Orders on Friday along with the final September University of Michigan Consumer Sentiment and Consumer Inflation Reading. 

The information provided in this article, including, without limitation, any opinions, predictions, forecasts, commentaries or suggestions, is for informational purposes only and should not be construed to be professional or personal investment, financial, legal, tax or other advice.