The yield of the benchmark 10-year Treasury note stood at 3.21 percent at the time of writing, getting closer to the high of 3 October of 3.23 percent.
Back then, a surprisingly hawkish comment from Fed Chairman Powell sent yields to a seven-year high. This time, the move is driven more by fundamental and political factors.
To start with, we have seen an acceleration of wage growth to 3.1 percent, a four-year high. The US Treasury had lifted the size of the auctions for the fourth time this year, reflecting the ever-increasing financing need of a government that has cut taxes aggressively without compensating cuts in expenditures.
This week, the market faces auctions totalling $83 billion alone, which is a very big chunk to swallow at a time in which the Federal Reserve is reducing its holdings.
Last but not least, we are waiting for the outcome of the mid-term elections. For a long time, the bond market has discounted a “blue wave”, i.e. gains of the Democrats, and counted on their opposition against further tax cuts.
The latest press reports show that the race is too close to call, so the bond market is becoming more anxious about the possibility of further tax cuts under a “status quo” regime.
Any opinions expressed here are the author’s own.
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