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WASHINGTON, Oct 23 – The yield on the benchmark 10-year US Treasury note declined on Monday after briefly rising above 5.0%, hitting the July 2007 milestone that it briefly attempted to scale last week and further threatening an economic slowdown on higher borrowing costs.

The run-up in yields on the 10-year Treasury note, seen as a safe haven in times of economic uncertainty and a benchmark for borrowing costs around the world, has been driven by investors pricing in stronger US growth as well as fiscal slippage.

Yields at the long end rose quickly after Federal Reserve Chair Jerome Powell said last week that the US economy’s strength and hot labor market might warrant tighter financial conditions.

The 10-year yield was briefly bid at a 16-year high of 5.001% on Thursday, breaking 5% again on Monday morning before slipping to 4.83%. It has risen 160 basis points since mid-May.

Yields have been tempered by the threat of an expanding conflict in the Middle East, which has caused investors to turn to the safe haven of US government bonds after Hamas fighters attacked Israel on Oct. 7.

“I think what you’ll see is a greater flow of foreign capital going to the United States where investors are going to seek a safe harbor,” said Bernard Baumohl, chief economist at The Economic Outlook Group in Princeton, New Jersey.

The 30-year bond on Monday posted its largest daily fall since mid-May. Its yield has slipped 9.8 basis points to 4.98%.

Billionaire investor Bill Ackman revealed Monday that he shared Baumohl’s sentiments, disclosing that he covered his previous bets against Treasuries on his expectation that the war would push more investor dollars toward US Treasuries.

The yield on the two-year Treasury note last stood at 5.06%.

The yield curve between the two-year and 10-year Treasury is the steepest it has been since mid-July. It last stood at minus 22.7.

The Treasury Department on Monday auctioned two sets of Treasury bills: USD 75 billion in 13-week bills and USD 68 billion in 26-week bills. More supply will come to the market this week in the form of a USD 51 billion auction by the Treasury of 2-year notes on Tuesday, USD 52 billion in 5-year notes on Wednesday, and USD 38 billion in 7-year notes on Thursday.

Several sets of economic data will be published this week that could inform the Fed’s rate path, including the latest GDP read on Thursday and personal consumption expenditures on Friday.

October 23 Monday 3:02PM New York / 1902 GMT

(Reporting by global markets team; Editing by Jonathan Oatis, Ros Russell and Alison Williams)

ORLANDO, Florida, Oct 23 – Leveraged funds trading US Treasuries futures have increased their record net short position across the curve, which will do little to soothe growing concerns among regulators about the potential financial stability risks these bets pose.

Hedge funds have rapidly built up short positions in US Treasuries futures this year as part of the so-called ‘basis trade’, a leveraged arbitrage play profiting from price differences between cash bonds and futures.

The Bank for International Settlements has warned that the huge build-up in speculators’ Treasuries positions “is a financial vulnerability”, and a recent Fed paper said it warrants “diligent monitoring”.

The price difference between cash bonds and futures is tiny, but funds make their money from high levels of leverage in the repo market and the sheer volume of trade.

Commodity Futures Trading Commission (CFTC) data for the week ending October 17 show that leveraged accounts – those funds and speculators more likely to be active in the basis trade – grew across the two-, five- and 10-year space by 250,000 contracts to a total 4.71 million contracts.

That is significantly larger than the peak combined net short position from 2019 of just over 4 million contracts.

The move was particularly strong at the shorter end of the curve. Leveraged accounts increased net short position in two-year futures by 133,000 contracts to 1.554 million contracts and by 92,000 contracts in the five-year space to 1.753 million.

That’s a whisker from the two-year record net short of 1.558 million contracts in 2019, and a fresh record five-year net short.

A short position is essentially a wager an asset’s price will fall, and a long position is a bet it will rise. In bonds falling prices indicate higher yields, and vice versa.

But funds play Treasuries futures for other reasons, like relative value trades, and this year, the basis trade.

These trades appear to be a key factor behind the US bond market’s steep decline in recent months, but by no means the only one.

Worries over the US government’s fiscal health, increased debt issuance from Treasury, the Fed’s ongoing ‘quantitative tightening’ program, stronger-than-expected economic growth, and a reassessment of the interest rate outlook have all contributed to the extraordinary bond selloff recently.

Yields across the curve last week hit their highest levels since 2006-07, and on Thursday the entire Treasury curve from one-month to 30-year yield maturities was within half a basis point of being above 5%.

(The opinions expressed here are those of the author, a columnist for Reuters; Writing by Jamie McGeever; Editing by Miral Fahmy)

Oct 23 – The big question this week hanging over global financial markets – and Asian markets in particular, given the lack of big-hitting regional economic indicators or policy decisions – is whether the US Treasuries selloff abates or not.

Third-quarter gross domestic product data from South Korea, and consumer price inflation reports from Australia, Singapore, and Tokyo are the main indicators this week, and flash purchasing managers indices from Japan and Australia will be published on Monday.

These figures may have a brief impact on their respective currencies, but are unlikely to move the dial in terms of broader market sentiment. That will come from the US bond market, and Monday’s price action could be instructive.

The ICE BofA Treasuries index fell 1.4% last week, its biggest fall since May, and is at an eight-year low. The TLT Treasuries ETF has lost a fifth of its value since mid-July.

Short-covering on Friday ahead of the weekend and Middle East event risk stopped the rot, at least momentarily. Perhaps ominously, however, Friday’s bond market relief didn’t ease the pressure elsewhere – Wall Street’s three main indices still closed 0.9%-1.5% lower.

The S&P 500 lost 2.4% last week, one of the biggest falls this year, and the VIX ‘fear index’ of US stock market volatility on Friday hit its highest since March.

That’s not a positive backdrop for Asia’s open on Monday, although braver investors might be looking for some bargains – the MSCI Asia ex-Japan index on Friday fell to its lowest in almost a year and is down 12% since the start of August.

Meanwhile, the stock and bond market selling has tightened financial conditions significantly. According to Goldman Sachs, financial conditions in emerging markets and globally are the tightest in almost a year.

It’s even worse in China – financial conditions in the world’s second-largest economy are the tightest since Goldman’s China index was launched in 2006.

Chinese central bank governor Pan Gongsheng on Saturday said that the central bank will make policy more “precise and forceful”, guide financial institutions to cut real lending rates, and reduce financing costs for firms and individuals.

His comments are significant because they are his first on policy since stronger-than-expected third-quarter economic data were released earlier this month.

In currencies, the yen and yuan open the week under heavy selling pressure and at critically important levels. Traders will again be on Bank of Japan intervention watch.

Meanwhile, Japanese and Australian PMI data for October are out on Monday. September’s reports showed that manufacturing activity in both countries shrank and services sector activity grew, although growth in Japan was the slowest this year.

Here are key developments that could provide more direction to markets on Monday:

– Japan flash manufacturing PMI (October)

– Australia flash PMI (October)

– Singapore inflation (September)

(By Jamie McGeever; Editing by Diane Craft)

NEW YORK, Oct 20 – Some investors believe a bond market selloff that has pushed the benchmark US Treasury yield to 5% may have more room to run, as the Federal Reserve gives little indication of veering from its “higher for longer” mantra.

Fed Chair Jerome Powell walked a narrow line in his speech before the New York Economic Club on Thursday, saying the stronger-than-expected economy might warrant tighter financial conditions while also noting emerging risks and a need to move with care.

Still, some traders interpreted his comments as an endorsement of keeping rates around current levels through most of next year. Yields on the benchmark 10-year Treasury, which move inversely to bond prices, rose briefly to 5% late on Thursday, a closely watched level not seen since 2007. Stocks sold off on Thursday with the S&P down 0.85%.

“The underlying message is ‘don’t be looking for a bailout from the Fed anytime soon,’” said Greg Whiteley, a portfolio manager at DoubleLine. “That gives people the go ahead to take rates above 5%.”

Whiteley said that he sees 10-year yields moving as high as 5.5% before peaking.

An extended climb in Treasury yields risks exacerbating the pressures that have dogged a broad array of assets in recent months. US government bonds are on track for an unprecedented third straight year of losses, while the S&P 500 is off 7% from its July high as the promise of guaranteed yields on US government debt draws investors away from equities. Credit spreads have widened in recent weeks, while mortgage rates have crept up to their highest since 2000.

“What really matters to the markets is how long we sustain 5% interest rates or higher and what sort of damage that does to the economy as a whole,” said Gennadiy Goldberg, head of US rates strategy at TD Securities. He believes a sustained move above 5% on the 10-year yield is “not out of the question.”

“The longer we remain at higher interest rates, the more likely something is to break,” Goldberg said.

Expectations that the Fed’s aggressive monetary tightening may cause a recession were pushed back several times over the past year as economic activity has proved more resilient to higher borrowing costs than many had predicted.

Powell on Thursday also nodded to the “term premium” as a driver for yields. The term premium is the added compensation investors expect for owning longer-term debt and is measured using financial models. Its rise was recently cited by one Fed president as a reason why the Fed may have less need to raise rates.

Sameer Samana, senior global market strategist at the Wells Fargo Investment Institute, said that higher yields and more broadly tightening financial conditions were “doing the Fed’s work for it” by tamping down growth and helping cool inflation.

While interest rate increases have an immediate impact on short-term yields, the recent surge in long-term bond yields indicates the market has embraced the idea that rates will remain higher for longer. “The Fed needs both barrels firing and now the long end of the curve has finally bought in that Fed won’t cut rates soon and when they do they won’t be sizable,” he said.

Alan Rechtschaffen, senior portfolio managers and financial advisor at UBS Global Wealth Management, was among those wary of the knock-on effects elevated yields could have.

“The Fed has to be cautious here because I don’t know that they’re entirely secure in being able to predict what’s going to happen next,” said Rechtschaffen, who believes yields will top out at around 5%, though a small risk exists of them going “significantly” higher.

Others saw hints of dovishness in Powell’s remarks, or at least caution. The Fed, Powell said, is “proceeding carefully” in evaluating the need for any further rate increases, a remark that left intact expectations that the Fed will keep its benchmark policy rate steady at the current 5.25% to 5.5% range at the upcoming Oct. 31-Nov. 1 meeting.

“There was an underlying sense of patience and caution, given the potential for delayed impacts of the tightening to date,” said Robert Tipp, chief investment strategist and head of global bonds at PGIM Fixed Income.

Still, even if the Fed cuts rates over the next few years, yields could stay above 5% if inflation and growth remain high, he said.

“A 5% yield is a shocking number … but the fact of the matter is that we’re back up to a level of rates that’s appropriate for this level of economic activity,” said Tipp.

(Reporting by Davide Barbuscia and David Randall; Additional reporting by Saqib Iqbal Ahmed; Editing by Ira Iosebashvili, Megan Davies, and Shri Navaratnam)