Andrea Innocenti The US bond market saw a sharp rebound in yields, with the five-year Treasury crossing the 5% threshold for the first time in over a year. The move was fueled by a combination of factors, including the prospect of a further Fed rate hike before the midterm elections and the release of stronger-than-expected macroeconomic data.
Fed rate hike anticipated before midterms
In recent days, Federal Reserve policy futures have shifted the probability of a further rate hike from 50% to 73% for the October 28 meeting. While the Fed traditionally adopts a wait-and-see approach to general elections, the initial tightening a few days ago and signs of persistent inflation have prompted the market to price in a further increase.
Forecasts point to four additional increases over the next 12-18 months, a scenario that explains the upward pressure on short-dated bonds.
US macroeconomic data stronger than expected
The U.S. composite PMI , compiled by S&P Global, rose from 56 in August to 58,4 in September, marking the fastest growth since July 2021.
The service sector saw its largest increase in output in over five years, while manufacturing hit its highest level since April 2022. Fed Board member Michael Barr warned that further monetary policy adjustments will likely be needed to contain inflation, whose 2% target remains out of reach.
Currency and real market reactions
The dollar index rose 0,5%, settling at 101 points, while two-year yields hit 4,95%. The yield curve has shifted upward across its entire structure: the five-year bond is above 5%, the ten-year at 5,12%, and the thirty-year at 5,4%. Ten-year real rates have exceeded 2,7%, penalizing non-coupon assets such as gold, silver, and Bitcoin.
Repercussions on stock markets and oil
The Nasdaq, which had recently hit new highs thanks to the "Magnificent Seven" rally, fell about 7 percentage point. In Europe, the Eurostoxx 50 recorded a 1,3% decline in futures, and the FTSE MIB limited its losses to -0,21%. Meanwhile, oil prices remained elevated: Brent surpassed $100 a barrel and WTI surpassed $90, despite Donald Trump 's remarks at the United Nations summit about a possible post-election price decline, which investors do not seem to believe.
The context of Treasury auctions
The five-year Treasury auction was held on September 23, recording the highest yield for such an auction since 2006. The market also observed a 3 million barrel increase in U.S. crude oil inventories to 426,4 million, versus expectations for a 641,000 barrel decrease, helping to maintain pressure on yields.