US 10-Year Yield Rises to 3.5% for First Time Since 2011

The 10-year Treasury yield briefly rose above 3.50% for the first time since 2011 on Monday, with the bond market extending its bearish run ahead of another jumbo rate hike expected this week by the Federal Reserve to bring down inflation.

The 10-year yield jumped as much as 6.6 basis points to 3.516%, breaking above a psychological level that held in mid-June, before easing to 3.47% by early afternoon in New York. The 30-year bond yield reversed an early rise above 3.56% and was lower by 2 basis points at 3.49%, helping intensify the curve inversion with the front end.

The main selling pressure in the Treasury market remained focused on the policy sensitive two-year note with the benchmark rising more than 9 basis points to 3.96%, marking a fresh high since October 2007.

The front end remained sharply higher in yield on the session as traders wagered that another three-quarter point hike at this week’s Fed review is largely a done deal. The prospect of a 100-basis point has relented in recent sessions, with the September meeting OIS contract showing 78 basis points of tightening, its lowest estimate in the past week.

Investors are also driving up expectations for just how high the US central bank might ultimately push policy rates early in 2023, with OIS contracts for March indicating a peak level of 4.48%.

“The path above 4% is easy to envision,” for the two-year yield, “assuming the dot plot signals a 4.25%-4.50% terminal rate,” Ian Lyngen, head of US rate strategy at BMO Capital Markets wrote. A 4.25% target on the two-year is “a reasonable objective if one takes the Fed’s commitment to holding rates at terminal for an extended period at face value.”