10-, 30-year Treasury rates finish short of 2023 highs after remarks by Fed officials

What happened

• The yield on the 2-year Treasury
  BX:TMUBMUSD02Y
  fell 3.5 basis points to 4.756% versus 4.791% on Friday. Monday’s level is the lowest since July 19, based on 3 p.m. figures from Dow Jones Market Data. Yields move in the opposite direction to prices.

• The yield on the 10-year Treasury
  BX:TMUBMUSD10Y
  advanced 1.6 basis points to 4.076% from 4.06% Friday afternoon.

• The yield on the 30-year Treasury
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  rose 4.2 basis points to 4.256% from 4.214% late Friday.

• The 10- and 30-year yields established their 2023 highs last Thursday, when they ended the New York session at 4.188% and 4.304%, respectively.

What drove markets

Weighing on traders were concerns about increased supply after the Treasury said last week that it would need to borrow $1 trillion in the third quarter.

See: Here’s the trade that pushed long-term Treasury yields to 2023 highs

Traders also evaluated remarks made by New York Fed President John Williams and Federal Reserve Gov. Michelle Bowman.

In an interview published by the New York Times on Monday, Williams said that it’s “an open question” whether additional rate hikes are needed and that rates could begin to come down next year. He added that if the U.S. economy shows signs of reaccelerating, the Fed would “probably need more restrictive policy to bring supply and demand back into balance.”

Separately, Bowman weighed in with relatively hawkish remarks on Saturday. She said the central bank will likely need to raise interest rates even higher to bring inflation down to tolerable levels.

Their comments came after labor data released on Friday showed the U.S. added a more modest 187,000 jobs in July, but there was still upward pressure on wages — suggesting inflationary pressures remain embedded in the economy. The next major U.S. inflation update is set for this Thursday, when the consumer-price index for July is released.

Markets are pricing in an 86.5% probability that the Fed will leave interest rates unchanged at a range of 5.25%-5.5% on Sept. 20, 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 November is priced at 29.5%.

The central bank is mostly expected to take its fed-funds rate target back down to around 5% or lower next March or May.

What analysts are saying

“The collective employment data suggests that the economy remains in expansion for now, supported by the Atlanta Fed’s Q3 GDP estimate of 3.9% growth,” said  Tony Welch, chief investment officer of wealth-management firm SignatureFD. “Coupled with the Fitch downgrade of the U.S. credit rating, Treasury yields have been moving higher as the prospect for Fed rate cuts continues to be pushed further out into the future, and a lower credit rating demands a higher premium, all else equal.”