Treasury Yields Jump as Fed Officials Hint at Extended Tightening

Expectations of the 10-year Treasury yield had been, in late September, a rate below 4%,  through the end of 2024 and then a period of settling into a mid-3% range through 2025.

But that seems to have gone out the window. There was an upward march starting in early October. It jumped from last Friday at 4.08% to 4.20% at Tuesday’s close. The forward predictive curve at Derivative Logic shows the yield dropping to just over 4% by the end of the year and not getting to 4.2% until October 2025.

There was The Conference Board’s Leading Economic Indicator. It declined by 0.5% to 99.7 in September 2024, following a 0.3% retreat in August. Between March and September, it dropped by 2.6%. The previous six-month period saw a 2.2% fall.

Other possible nudges could come from the words of several Federal Reserve officials, all of whom made public addresses on Monday. Lorie Logan, president of the Federal Reserve Bank of Dallas, while addressing the Securities Industry and Financial Markets Association annual meeting, said that the economy is strong and stable — something virtually any Fed official is likely to say at the moment.

However, she also noted “uncertainties in the outlook,” including real upside risks to inflation, which could be taken as a potential of higher interest rates in the future. Also, she said that is balanced by downside risks to the labor market.

“If the economy evolves as I currently expect, a strategy of gradually lowering the policy rate toward a more normal or neutral level can help manage the risks and achieve our goals,” Logan said. “However, any number of shocks could influence what that path to normal will look like, how fast policy should move and where rates should settle.”

Jeff Schmid, president of the Kansas City Fed, spoke to the Chartered Financial Analysts Society of Kansas City. “While I support dialing back the restrictiveness of policy, my preference would be to avoid outsized moves, especially given uncertainty over the eventual destination of policy and my desire to avoid contributing to financial market volatility,” he said, which was another voice for caution.

And later in his talk, Schmid said, “It is my belief that interest rates could settle well above the levels we saw in the decade before the pandemic. There are several reasons why this may be true. One favorable, and some may say optimistic, scenario is that continued strong productivity gains boost economic growth, strengthen investment and support consumption. Such a combination would increase the demand for investable savings and hence push up interest rates.”

And then, as CNBC reported, Minneapolis Fed President Neel Kashkari said on Monday that interest rates over the longer term could be higher than they had been in the past.

The total seems like more than what we’re used to and a scenario that could push down 10-year prices, and drive up yields.