US yields boosted by Fed minutes, 10-year note auction

NEW YORK – US Treasury yields rose on Wednesday in volatile trading, as investors continued to price in a less aggressive monetary easing cycle from the Federal Reserve, with gains further boosted by a weaker-than-expected auction of 10-year notes.

The US benchmark 10-year yield hit a fresh seven-week high of 4.078%, while two-year yields, which are more sensitive to interest rate expectations, rose in five of the last six sessions.

Dallas Fed President Lorie Logan, who is not a voter at this year’s Federal Open Market Committee (FOMC), expressed the US central bank’s gradual approach in remarks on Wednesday, fueling a rise in Treasury yields. She said she supported last month’s big interest-rate cut but wants smaller reductions ahead, given “still real” upside risks to inflation and “meaningful uncertainties” over the economic outlook.

Chip Hughey, managing director of fixed income at Truist Advisory Services in Richmond, Virginia, said he understood why the Fed is leaning toward smaller rate cuts.

“The reality is that the Fed is still in restrictive territory,” he noted. “There is plenty of room for the Fed to reduce the fed funds rate over a year and a half to get it down to the neutral level.”

US yields rose after Logan’s comments. US two-year yields, were last up 4 basis points (bps) at 4.019%, gaining in five of the last six trading days.

The Fed minutes were also released on Wednesday and offered very little surprises for the market. US yields did drift higher after they came out.

The minutes showed that a “substantial majority” of Fed officials at the September meeting supported launching the easing cycle with an outsized half-point rate cut. There was also broad agreement that the initial move would not commit the Fed to a particular pace of cuts in the future.

The US rate futures market has factored in an 83% chance of a 25-bp rate cut at the November meeting, and 17% chance of a pause, higher than the 12% seen on Tuesday, according to LSEG calculations.

The futures market also showed about 47 bps of easing this year, down from more than 50 bps early this week. It also priced in about 94 bps of Fed cuts in 2025. Next year’s rate cut probability was a sharp decline from the roughly 200-250 bps reductions being estimated prior to last Friday’s blowout US nonfarm payrolls report that recalibrated Fed easing expectations.

In afternoon trading, the yield on the benchmark US 10-year note climbed 3.6 bps to 4.071%.

The 10-year note auction was lackluster overall, with a yield of 4.066%, higher than the rate forecast at the bid deadline. Much like the three-year note sale on Tuesday, investors demanded a higher yield to buy the benchmark note.

The bid-to-cover ratio, another measure of demand, was 2.48, the lowest since August.

In other maturities, US 30-year bond yields, were up 2.1 bps at 4.346%.

The yield curve flattened a little bit on Wednesday, with the spread between US two-year and 10-year yields at 4.8 bps, from 5 bps late on Tuesday. The flattening suggested that the rates market expects a slower pace of Fed easing, or smaller rate cuts, in the coming months.

For Thursday, the US consumer price index will be in focus after the labor market showed little signs of slowing.

Vishal Khanduja, co-head of Broad Markets Fixed Income at Morgan Stanley Investment Management in Boston, believes the disinflation trend will continue.

“There could be some disruptions in the fourth quarter because of the (Middle East) war and now the hurricanes. But the overall trend will continue to be lower.”

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Emelia Sithole-Matarise and Daniel Wallis)