Treasury Yields Retreat From 2002 Highs as Oil Eases and Bessent Vows to Tame Debt
US Treasury yields eased from 24-year highs as oil prices retreated and Treasury Secretary Bessent pledged to rein in debt, but investor skepticism persists over fiscal and monetary policy outlooks.
Chanan Zevin - Chief Editor and Head of Desks
Yields Retreat After Multiyear Surge
US Treasury yields declined on Tuesday, pausing after a surge that had pushed the 10-year and 30-year benchmarks to their highest levels since 2002. The 10-year yield fell more than 2 basis points to 5.286%, while the 30-year yield slipped less than 1 basis point to 5.659% after both reached 24-year highs on Monday. [S1]
The pullback in yields marked a brief respite in a bond market that has been volatile for weeks. The 2-year Treasury note yield also moved lower, down more than 3 basis points at 4.80%. These moves followed a period of rapid increases, driven by economic data and shifting expectations for Federal Reserve policy. [S1]
Market participants have been closely watching the relationship between yields and economic indicators. Recent data from the Institute for Supply Management showed a slight cooling in services growth, with the PMI reading at 54.9 in September, just below August’s level. This contributed to the moderation in yields. [S1]
Energy Prices and Market Sentiment
A key factor behind the easing in yields was a retreat in oil prices, which fell below $100 a barrel. This decline in crude was seen as a sign that inflationary pressures might abate, providing some relief to bond investors concerned about persistent price increases. [S2]
James Ringer, a fund manager at Schroders, emphasized that for a meaningful rally in Treasuries, energy prices—both crude and refined products—would need to decline. He noted that the recent dip in oil prices was a necessary, but not sufficient, condition for stabilization in the bond market. [S2]
The recent volatility in energy markets has been closely linked to geopolitical tensions, particularly the US-Iran conflict. As oil prices stabilized, yields responded accordingly, but the sources note that the decline in crude was quickly erased, underscoring the fragility of the current environment. [S3]
Bessent’s Fiscal Promises and Investor Skepticism
Treasury Secretary Scott Bessent sought to reassure investors, stating that a combination of economic growth and spending restraint would 'very quickly' alter the path of US government borrowing. He described the government’s intention to start 'bending that curve' on debt. [S2]
Despite Bessent’s assurances, investor skepticism remains high. Gareth Berry, a strategist at Macquarie, remarked that 'the market is likely to be very skeptical, given the deficit is 6% and there is no plan to reduce it.' He pointed out that a stated ambition does not constitute a concrete plan. [S2]
Bridgewater Associates founder Ray Dalio warned that the US is nearing the limits of its debt cycle and could face a crisis within three years if spending continues to outpace revenue. He also highlighted the vulnerability of Treasuries to reduced demand from major foreign creditors such as China and Japan. [S2]
Fed Policy and Market Expectations
Traders are currently pricing in a roughly 80% chance that the Federal Reserve will keep rates unchanged at its next meeting, according to CME Group’s FedWatch tool. This reflects a shift in expectations following recent economic data and the moderation in yields. [S1]
HSBC strategists have described market pricing for about 80 basis points of Fed hikes over the next year as 'excessive.' They expect the gap between five- and 30-year Treasury yields to widen, reflecting ongoing uncertainty about the direction of monetary policy. [S3]
Morgan Stanley Wealth Management’s Lisa Shalett noted that bond market volatility has increased, but not to the extremes seen during the 2022 equity bear market. She cited the potential for a new Fed policy framework, economic growth, and high oil prices as contributing factors. [S1]
Outlook: Volatility and Structural Concerns
Despite the recent pullback, many investors remain cautious. Dhiraj Narula, US rates strategist at HSBC, observed that the surge in volatility and lack of clear technical resistance at current yield levels have kept many investors on the sidelines, even as long-end rates appear attractive. [S2]
The sources highlight that concerns about the US fiscal trajectory and the absence of a detailed plan to reduce deficits continue to weigh on sentiment. Investors are reluctant to call an end to the bond selloff without more concrete evidence of fiscal discipline or a sustained decline in energy prices. [S3]
Bloomberg strategists note that while recent data has been 'dovish leaning,' the economy remains resilient, and financial conditions are still loose. Without clear signs that higher rates are constraining growth, a significant Treasury rally appears unlikely in the near term. [S3]