Treasuries are starting the week on an optimistic note, buoyed by tumbling oil prices and assurances that tens of billions of dollars in Japanese currency interventions won’t be funded from sales of US government debt.
The rise on Monday pushed the yields on 10-year benchmark securities lower by five basis points to 4.69%, the best start to a week in more than two months. Inflation worries eased as Brent crude for October settlement dropped nearly 5% after US President Donald Trump over the weekend called off what he said was a major attack on Iran, while Tehran suggested talks to get ships moving through the Strait of Hormuz are making progress.
“Oil remains the wildcard and could be the deciding factor in whether we’re looking at lower or higher rates by the end of this week,” said Michiel Tukker, a rates strategist at ING Groep NV.
That brought relief to a Treasury market, where 30-year yields hit their highest in almost two decades on Thursday on concern that Federal Reserve Chairman Kevin Warsh’s inflation fighting credibility was eroding two months into the job. Traders in the options market last week looked to hedge the potential for higher yields over the coming weeks.
Speculation Treasuries were being sold to fund $53 billion in interventions to bolster the yen may have also contributed to the higher yields, Morgan Stanley strategists including Koichi Sugisaki said.
“When Japan’s Ministry of Finance intervenes in the FX market, it generally seeks to avoid affecting other markets through outright sales of assets such as US Treasuries,” they said.
Treasury Secretary Scott Bessent helped dial down concern on Sunday by championing a Fed facility that enables overseas central banks to use their Treasury holdings as collateral to access dollars, rather than selling the bonds on the open market to raise cash. It was created during the pandemic in 2020 to allow counterparties to raise liquidity without overly disrupting the Treasuries market.
What Bloomberg Strategists Say…
“Declines in Treasury yields will be limited this week as investors confront updated government borrowing projections, Wednesday’s refunding announcement and next week’s duration-heavy auctions.”
Alyce Andres, Macro Strategist, Markets Live
For the full analysis, click here.
Yen Debate
The role of Treasuries in Japan’s currency markets sparked debate among market watchers on social media.
Mohamed El-Erian, an adviser to Allianz SE, said he suspected concerns about US yields was one reason “the US broke a decade-plus policy of not interfering with the market-setting of exchange rates.”
James Thorne, chief markets strategist at Wellington-Altus Private Wealth Inc., went further in saying the episode “has the feel” of a new accord between Washington and Tokyo as “when the largest foreign holder of US debt becomes a seller, the long end will reprice.”
By contrast, Brad Setser from the Council on Foreign Relations wrote on X that “foreign demand for the long bond and the long end of the Treasury curve hasn’t been strong for a while.”
Elsewhere, German and UK bonds were rallying alongside Treasuries on Monday, sending their respective yields as much as 10 basis points lower. Odds on the Fed hiking interest rates a quarter-point in September are hovering around two-in-three with an almost even chance of two such increases by year-end.
Written by: James Hirai — With assistance from Cameron Fozi @Bloomberg
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