U.S. Treasury yields resumed their climb on Thursday, retracing most of Wednesday's drop that followed the Treasury's surprise buyback pledge, and pushed Wall Street to a two-week low. Fed presidents Mary Daly and Alberto Musalem pushed back on credibility concerns even as traders slashed the odds of a September rate hike. A 30-year TIPS auction drew the strongest demand for U.S. debt since December 2020.
U.S. government bond yields rose again on Thursday, retracing most of Wednesday's decline that followed the Treasury's pledge to buy back more longer-dated debt, as investors questioned whether the intervention would deliver lasting relief. The benchmark 10-year yield climbed 4.7 basis points to 4.7%. The 30-year yield rose 5.4 basis points to 5.247% after touching 5.1765% earlier in the session.
Treasury's relief proves short-lived
Lawrence Gillum, chief fixed-income strategist at LPL Financial, said the buyback announcement is "more of a band-aid than a panacea." Stocks reflected that unease: the S&P 500 dropped 0.9% and the Nasdaq fell 1%. The Dow lost 1.3% on the same session.
Fed officials split on urgency
San Francisco Fed President Mary Daly and St. Louis Fed President Alberto Musalem both dismissed talk of a Fed credibility problem, yet diverged on how urgent the fight against inflation still is. Daly said Treasury market pricing suggests monetary policy is appropriately positioned and does not see evidence a preemptive move is urgent. Musalem, however, put underlying inflation between 2.5% and 3%, calling that level too high, though he too attributed the selloff to competition for capital from government financing and AI infrastructure spending rather than credibility concerns.
Traders adjusted their bets after the remarks: odds of a September rate hike fell to around 30% from more than 70% at the end of July. That came even as the 30-year yield climbed to its highest level since 2007. Three policymakers had dissented in favor of a rate hike at the July meeting, a split the Daly-Musalem exchange left unresolved.
Demand test and market reaction
Thursday's session included a direct test of appetite for U.S. debt: a 30-year TIPS auction drew the strongest demand since December 2020, with a bid-to-cover ratio of 2.82. Elsewhere, Brent crude rose 2% to $93.49 a barrel amid ongoing disruption in the Strait of Hormuz.
The dollar index touched a three-month low before ending flat, while the euro traded above $1.17 for the first time since May. Minutes from the Fed's latest policy meeting, released Wednesday, showed inflation concerns deepening, with a number of policymakers appearing ready to raise rates and many others saying a further rate increase would be needed if inflation doesn't decline to the 2% target.
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