By Wolf Richter for WOLF STREET.
It was probably not the best timing ever for the 10-year Treasury auction to fall on the day that the CPI inflation data had given people the willies hours earlier, with its ugly core-services and supercore services CPI pushing up core CPI and overall CPI.
The $39 billion 10-year Treasury notes were sold at a yield of 4.56%. This yield was up by 21 basis points from where they traded minutes before the CPI report was released, and it was up by 50 basis points from the 10-year Treasury auction a month ago.
In the secondary market, the 10-year Treasury yield spiked by 19 basis points from the prior day, to 4.55%, the highest since mid-November. The blue line represents the Effective Federal Funds Rate (EFFR), currently at 5.33%, that the Fed brackets with its target range of 5.25% to 5.50%.
The difference between the 10-year yield (red) and the EFFR (blue) gives us an indication to what extent the bond market is still in denial, after it got whipped into hilarious frenzy during Rate Cut Mania late last year and into early this year.
But the 10-year yield has risen by 80 basis points since then, as folks were trying, apparently, to come to grips with reality. And it has a long way to go.
Who the heck would want a 10-year Treasury note yielding 4.56% if CPI inflation gets sticky around 5% for years to come? Apparently, lots of people — or else the yield would be a lot higher.
But they’re not seeing inflation sticky at 5% for years to come. They’re still seeing inflation in the below-3% range. So we disagree on where inflation is going. But today’s spike of the 10-year yield shows that longer-term inflation scenarios are getting tinkered with after today’s inflation data.
Today’s 19-basis-point jump for the 10-year yield was the biggest since September 22, 2022 (also 19 basis points), and both had been the biggest since June 2022:
A bloodbath was had by all, but it was worse in the midrange, with the two-year yield jumping 23 basis points to nearly 5% and with the 3-year yield jumping 25 basis points to 4.77%.
6-month yield: +6 basis points to 5.40%
1-year yield: +16 basis points to 5.19%
2-year yield: +23 basis points to 4.97%
3-year yield: +25 basis points to 4.77%
5-year yield: +24 basis points to 4.61%
7-year yield: +21 basis points to 4.59%
At the auction yesterday, $57 billion of 3-year Treasury notes were sold at a yield of 4.55%.
In the secondary market today, the 3-year yield’s jump of 25 basis points was the biggest since June 2022. Today’s yield of 4.77% is just 26 basis points below the high in this cycle on October 18, 2023, of 5.03%, though inflation-denial is still driving this market, as we can see in this chart:
But Rate-Cut Mania is over, is what the six-month yield is telling us. The window of the six-month yield – bondholders don’t care what happens after their security matures in six months – now goes into October, and it shows that the market is in the process of walking back from rate cuts during the time frame, with the yield today rising 6 basis points to 5.40%, into the upper portion of the Fed’s target range.
Mortgage oh my. The average 30-year fixed mortgage rate spiked 28 basis points today, to 7.34%, the highest since November 20, according to the daily measure by Mortgage News Daily, which is going to cause a lot of potential buyers to turn on their heels and do more wait-and-see, while potential sellers get to reminisce about the good old times of 6% mortgage rates in 2022.
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