Long-term U.S. Treasury yields fell as a global stock rally reduced the appeal of safe-haven assets, while Fed Chair Kevin Wash's remarks left interest rate expectations largely unchanged.
The sell-off initially pushed yields on 10- to 30-year U.S. Treasuries up more than 5 basis points, but after the U.S. stock market opened at 9:30 ET, shares of major tech companies fell, narrowing the gains in Treasury yields. Short-term U.S. Treasury yields also erased their gains following the market open.
U.S. Treasury yields touched their lowest levels in weeks on Thursday, supported by market expectations that the U.S. government may reduce supply of its longest-dated bonds starting next month. The survey to be released at 12 ET could address this possibility.
Meanwhile, markets still expect the Fed to keep rates unchanged at its meeting later this month and raise them in 12. Earlier Friday, Wash made no mention of monetary policy or his outlook for the U.S. economy during a discussion at the IMF Annual Meeting in Bangkok.
Driven by a lack of new catalysts, U.S. Treasury yields followed global risk sentiment, which improved moderately on Friday. This reversed the market mood from the previous day, when sharp selling in AI-related stocks prompted investors to flock to Treasuries for safety.
Mizuho International Fixed Income Strategist Leejun Foo stated: "This pullback is a typical move. Selling pressure has concentrated in the long end, driven by accelerating growth, inflation, and fiscal concerns—none of which have dissipated."
After Wash's speech, market expectations for longer-term U.S. rates remained largely unchanged; the swap market now fully prices in three additional rate hikes of 25 basis points each over the next 12 months. With no more hawkish tone from him, traders grew more confident that rates will hold steady this month, pushing the market-implied probability of a hike down from 30% to 20%.
Prospects of further tightening by the Federal Reserve have kept U.S. Treasury yields elevated, especially after this week's data showed that inflation pressures remain high at both consumer and wholesale levels.
Meanwhile, Thursday's tech stock sell-off sparked doubts about the sustainability of the current AI investment boom. This prompted some investors to reduce their bearish bets on long-term U.S. Treasuries, whose yields had previously risen to 20-year highs.
Steven Barrow, Head of Global Macro Strategy at Standard Bank, stated that the recent rise in U.S. Treasuries is short-lived, signaling a continued erosion of their safe-haven status. He added that the Federal Reserve needs to tighten policy further, which will keep upward pressure on yields. Meanwhile, global investors are increasingly diversifying their allocations, shifting toward a broader range of equities rather than bonds.
Regarding the outlook for long-term U.S. Treasury supply, the U.S. Treasury Department is set to release its quarterly financing policy statement on 11/4. The process begins Friday with a questionnaire sent to approximately 20 primary dealers.
Due to persistent fiscal deficits and doubled interest expenses on existing debt over the past five years, U.S. government financing needs are rising. However, analysts and investors say the U.S. can meet these needs by increasing short-term debt issuance, keeping long-term bond auction sizes steady or even reducing them.
