A recent auction of US$42 billion in 10-year US Treasuries saw weak demand from investors, resulting in a sale at 5.02 per cent. This yield was higher than the 5.01 per cent yield on long-end debt in the secondary market before the subscription period ended. The auction occurred amid the most violent bond sell-offs seen in months, triggered by a hot inflation reading and a hawkish comment from a Federal Reserve official.
The auction results halted a month-long recovery in the US bond market, which had previously been aided by falling crude oil prices and turmoil in the AI trade. The bond market has generally struggled throughout the year with stubborn inflation, rising funding costs, and reduced holdings from sovereign owners like Japan and China.
Federal Reserve governor Christopher Waller signaled a hawkish stance, stating he would back 50 basis-point rate increase if inflation was not contained. This, combined with October consumer prices coming in hotter than expected, led rates traders to almost fully price in a hike for next month. Stephen Innes, a managing partner at SPI Asset Management, noted that money markets shifted from viewing December’s quarter-point hike as a near certainty to entertaining the prospect of something considerably large.
On Tuesday, the 10-year yield—a benchmark for loans and mortgage rates—climbed back above 5 per cent. The more rate-sensitive two-year yield rose 18 basis points to 4.7524 per cent, marking its largest increase in 19 months. According to the CME Group, there is currently an 85.3 per cent probability of a 25 basis point hike at next month's policy meeting, with a 14.7 per cent chance of a half-percentage-point hike.
The underlying data showed US consumer prices rose 0.4 per cent month-on-month in October. Core inflation, which excludes food and energy, accelerated to 0.3 per cent, with both figures exceeding what economists had estimated. This follows a quarter-point increase in September, which was the only increase after Kevin Warsh became the chair in May.
The renewed turmoil in US Treasuries will bolster the case for China to extend its reduction in such exposure for the purpose of diversifying its foreign reserves and promoting the yuan as a global reserve currency. China's holdings of US Treasuries fell to an 18-month low of US$590.7 billion in August, according to the Treasury Department. Japan, the largest holder, also pared its exposure that month on speculation that Tokyo sold the bonds to fund its intervention in the foreign-exchange market.
Furthermore, rising Treasury yields are set to further cloud the outlook for the US hyperscalers that were pummelled last week by concerns about tighter government scrutiny. Higher capital costs are set to add financial strain on those providers of cloud computing power that have been turning more to the bond market for financing AI infrastructure investments.
