Bond Yields End Higher After Wild Session, Lifted By Inflation Data

A wild day of bond-market swings left Treasury yields higher Thursday, reflecting investors’ bets that the latest hot inflation report would push the Federal Reserve to raise interest rates more than previously anticipated.

Yields, which rise when bond prices fall, initially surged toward new multiyear highs after the inflation data, threatening a dramatic break from their recent trading range. Bonds rallied with stocks later in the session, eroding some of the climb. But, unlike stocks, they failed to recoup all of their price declines.

As has often happened this year, yields rose most sharply on short-term bonds, which are particularly sensitive to the near-term interest-rate outlook. But they also climbed on longer-term Treasurys, which tend to have a larger impact on the financial markets and the economy.

Taken together, Thursday’s moves in stocks, bonds and currencies were difficult to understand, said Zach Griffiths, a senior strategist at the research firm CreditSights. They provided more evidence, he added, of “just how volatile markets are and how difficult [they are] to navigate.”

Still, he said, Treasury yields, on their own, did tell a coherent story—with rising short-term yields driven by bets on higher rates and the less-rapid increase in longer-term yields reflecting a “recognition that recession risks are rising.”

At one point Thursday, the yield on the benchmark 10-year Treasury note reached as high as 4.073%—on track for its first close at 4% or higher since 2008, according to Tradeweb. It eventually settled at 3.952%, still up from 3.901% Wednesday and around 3.85% Thursday morning just before the Labor Department released its latest consumer-price index data.

Once again, that data was disappointing to investors. Coming into Thursday, investors had hoped to see a cooling in so-called core inflation, which excludes volatile food and energy categories. Instead, those prices rose 0.6% in September from the previous month—above the forecast of economists surveyed by The Wall Street Journal, who had expected a gain of 0.4%.

Treasury yields are largely determined by what investors expect interest rates set by the Fed will be over the life of a bond. They, in turn, set a floor on borrowing costs across the economy, with rising yields pushing up rates on everything from mortgages to corporate bonds.

Interest-rate derivatives on Thursday showed that investors have essentially no doubt that the Fed will raise rates by at least another 0.75 percentage point at its next meeting in early November. They also showed the chances of a 0.75 percentage point increase in December rising to about 60% to 70% from less than 35% on Wednesday.

The inflation report caught bond investors at a vulnerable moment. Hammered all year by domestic inflation and the Fed’s response, Treasurys have encountered new threats in recent weeks from overseas developments. In particular, they were hurt by volatility in the U.K. bond market stemming from investors’ concerns about recently released tax-cut plans in that country.

They have also been generally weighed down by actions taken by global central banks to both fight inflation and support their local currencies. Many central banks have aggressively raised interest rates. Some in Asia have also intervened in foreign-exchange markets, raising concerns among investors that they might be selling U.S. Treasurys in the process.

Complicating matters on Thursday, Treasurys got some support from overseas events. Most notably, U.K. bonds staged a major rally in response to speculation that the U.K. government might reverse some of its new budget policies. That, analysts said, helped drag down Treasury yields overnight and mitigated their climb after the inflation data.

The 10-year yield has briefly inched above 4% in a couple of overnight trading sessions in recent weeks. But it has yet to settle above that threshold.

The yield has climbed from 1.496% at the end of last year and 3.131% at the end of August, contributing to deeply negative returns for investors across a range of asset classes.

China’s economic recovery isn’t gaining the momentum money managers are awaiting.

Data from China Beige Book show that the economic green shoots glimpsed in August didn’t sprout further in September. Job growth and consumer spending faltered, while orders for exports came in at the lowest level since March, according to a monthly flash survey of more than 1,300 companies the independent research firm released Thursday evening.

Consumers’ initial revenge spending after Covid restrictions eased could be waning, the results indicate, with the biggest pullbacks in food and luxury items. While travel remains a bright spot ahead of the country’s Mid-Autumn Festival, hospitality firms and chain restaurants saw a sharp decline in sales, according to the survey.

And although policy makers have shown their willingness to stabilise the property market, the data showed another month of slower sales and lower prices in both the residential and commercial sectors.

Even more troubling are the continued problems at Evergrande Group, which has scuttled a plan to restructure itself, raising the risk of a liquidation that could further destabilise the property market and hit confidence about the economy. The embattled developer said it was notified that the company’s chairman Hui Ka Yan, who is under police watch, is suspected of committing criminal offences.

Nicole Kornitzer, who manages the $750 million Buffalo International Fund (ticker: BUIIX), worries about a “recession of expectations” as confidence continues to take a hit, discouraging people and businesses from spending. Kornitzer has only a fraction of the fund’s assets in China at the moment.

Before allocating more to China, Kornitzer said, she needs to see at least a couple quarters of improvement in spending, with consumption broadening beyond travel and dining out. Signs of stabilisation in the housing market would be encouraging as well, she said.

She isn’t alone in her concern about spending. Vivian Lin Thurston, manager for William Blair’s emerging markets and China strategies, said confidence among both consumers and small- and medium-enterprises is still suffering.

“Everyone is still out and about but they don’t buy as much or buy lower-priced goods so retail sales aren’t recovering as strongly and lower-income consumers are still under pressure because their employment and income aren’t back to pre-COVID levels,” said Thurston, who just returned from a visit to China.

“A lot of small- and medium- enterprises are struggling to stay afloat and are definitely taking a wait-and-see approach on whether they can expand. A lot went out of business during Covid and aren’t back yet. So far the stimulus measures have been anemic.”

Beijing needs to do more, especially to stabilise the property sector, Thurston said. The view on the ground is that more help could come in the fourth quarter—or once the Federal Reserve is done raising rates.

The fact that the Fed is raising rates while Beijing is cutting them is already putting pressure on the renminbi. If policy makers in China wait until the Fed is done, that would alleviate one source of pressure before their fiscal stimulus adds its own.

Bond Yields End Higher After Wild Session, Lifted By Inflation Data

Higher Treasury yields reflect bets that the inflation report will lead the Fed to raise interest rates more than previously anticipated