Real Treasury yields rose after a hot survey and Fed rate warnings
The 10-year Treasury yield rose 16 basis points to 5.17% in the week ended Friday, September 25, with 15 of those basis points coming from a higher real yield, and a fund of Treasuries maturing in 20 years or more fell 2.4%.
Washington Trust Bank said the selloff accelerated after a hot reading on US business activity, and that Fed comments pointing to further rate increases and soft Treasury auctions added to the pressure.
S&P Global's early survey put that activity at 58.4 in September, up from 56.0 in August. The firm said it was the fastest pace since July 2021.
"Risks to achieving our inflation target have increased, while risks to the labor market have receded," Federal Reserve Governor Michael Barr said Wednesday, at a Chicago Fed housing conference.
"In my base case, further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion."
The Fed had raised its target range to 3.75% to 4.00% the week before. On Thursday in London, New York Fed President John Williams said it was reasonable to think rates might need to rise again before the end of the year.
By Friday morning, Washington Trust Bank said, CME FedWatch put the chance of an October increase at 66.4%, up from 57.6% a week earlier.
Washington Trust Bank said soft auction demand also pushed yields higher. Wednesday's $70 billion sale of five-year notes cleared at 5.033%, above the 5.002% yield in the market just before the auction, a gap the bank put at 3 basis points. Thursday's seven-year sale, the bank said, cleared nearly 1 basis point above the market yield.
Wednesday's jump was almost parallel. The two-year rose 14 basis points and the 10-year rose 15.
The 10-year had fallen 5 basis points on Monday, and it rose another 7 on Thursday. The two-year fell 5 basis points on Tuesday, rose 2 on Thursday and gave back 6 on Friday. That is how a 14 basis point rise on Wednesday became a 5 basis point week, with the two-year ending at 4.81%.
The gap between the 10-year and the two-year widened from 25 basis points to 36. Wednesday barely changed it.
The 30-year yield ended at 5.49%, up 15 basis points, after rising again on Friday.
The inflation-protected 10-year yield, the real rate, rose 15 basis points, to 2.83%. The breakeven, the gap between a regular 10-year Treasury and that real yield, rose 1 basis point, to 2.34%.
What the funds did
A few basis points at two years barely moves a short fund. Fifteen at the long end moves a long one.
TLT fell Wednesday and Thursday; SHY barely moved
- TLT · 79.32
- IEF · 90
- SHY · 81.21
Short funds were flat to slightly higher. The gain in the bill fund is a week of interest.
Losses started in intermediate Treasuries and grew with maturity. TIP fell too. Those bonds are priced off the real yield.
Through Thursday, investment-grade bonds' yield over Treasuries widened 2 basis points, to 79 basis points, on the ICE BofA index. High-yield bonds' yield over Treasuries widened 12 basis points, to 280 basis points.
Even so, LQD fell more than HYG. iShares reported an effective duration of 7.63 years for LQD as of Thursday, September 24, and 3.16 years for HYG as of Wednesday, September 23. A jump in yields lands harder on the longer fund.
Lipper estimated $5.93 billion flowed into US bond funds, up from $562 million the week before. Short-to-intermediate government and Treasury funds took $2.15 billion, short-to-intermediate investment-grade funds took $1.63 billion, and funds that hold floating-rate bank loans took $1.31 billion.
The new money went to short and floating-rate funds, the parts of a bond sleeve a rise in long yields barely touches.
Frequently asked
Why did Treasury yields rise this week?
Washington Trust Bank pointed to a hot S&P Global business activity reading of 58.4, Fed officials hinting at more rate increases, and soft Treasury auctions.
How much did long-term Treasury funds lose?
TLT, which holds Treasuries maturing in 20 years or more, fell 2.4% for the week, while SHY was flat and IEF fell 0.9%.
Why did LQD fall more than HYG even though high-yield spreads widened more?
iShares put LQD's effective duration at 7.63 years against 3.16 years for HYG, so the jump in yields hit the longer fund harder.
Where did new bond fund money go?
Lipper estimated $5.93 billion flowed into US bond funds, mostly into short-to-intermediate government, short-to-intermediate investment-grade and floating-rate bank loan funds.