Treasury slide reaches third day as Fed rate cut bets fade

Treasury yields climbed for the third straight day amid growing expectations that the Federal Reserve will lower interest rates at a gradual pace and as traders fretted about the potential inflationary implications of the US presidential election. 

Yields climbed across maturities on Wednesday, with the benchmark 10-year rate reaching 4.25%, its highest since July. Rising speculation in betting markets that former President Donald Trump will win the Nov. 5 vote is also helping push up yields as he’s seen as likely to stoke growth and inflation through an agenda of tax cuts and steeper tariffs. Signs of a resilient US economy and stubbornly high inflation have also fueled the move.

Swaps prices reflect less than a 100% certainty that the central bank reduces rates at each of its two remaining policy meetings. The bond market is also trimming bets on the degree of Fed rate reductions over the next year. Traders will get more clarity next week on how much officials are likely to ease, with the release of a key labor -market reading for October.

“A lot of people had assumed, ‘Hey the Fed started the cutting cycle so yields are going down,’ and when that didn’t come to fruition there’s repricing of those expectations,” said Kathryn Kaminski, chief research strategist and portfolio manager at quant fund AlphaSimplex Group. The firm’s systematic models remain net long Treasuries, although with the trend signals weakening during the recent selloff those positions have been trimmed, she said.  

“There’s been a little bit of a pendulum swing with a repricing of Fed expectations after the recent inflation data and strong labor-market data - so yields are selling off,” she said.

The price of options that protect against an extended slump in Treasuries has soared to the highest this year amid concerns that losses may deepen. Treasuries have lost 2.1% this month through Tuesday, according to a Bloomberg index, following five months of gains.

The slide in US government debt comes in contrast to a rally in short-term European bonds as traders add to wagers that the European Central Bank will lower rates by half a point in December to prop up the bloc’s flagging economy. 

This diverging backdrop of heightened potential for more rapid rate cutting in Europe versus by the Fed has investors including Pacific Investment Management Co. and Vanguard favoring the debt.

“People are worried about the bond market now,” said Suhail Shaikh, chief investment officer at Fulcrum Asset Management, which manages $7.7 billion. “The Fed had been priced too aggressively in markets in terms of rate cuts relative to what the economy really needed.”