The US 2-year bond has now returned to levels first seen in June this year, when the funds rate was 25 basis points lower. The 10-year bond is off its recent highs, but remains nearly 80 basis points higher than where it was in June. The curve has clearly steepened during this period.
However, things have changed since the weekend. The bear market bubble has burst within 10 years and the market has reduced the risk of a looming rate hike. Inflation readings in the coming days will have a say, and month-on-month readings are still a little high in the CPI. That is the most likely impetus for yields to rise again.
It is interesting that the 3 year auction failed yesterday. There was a strong market at the time, which can help control the negative aspects. But at the same time, indirect supply (including central banks) was notably subdued, indicating relatively weak demand from end investors.
All eyes clearly remain on the tragic scenes unfolding in Israel, and there is deep concern for what is to come. This story will likely remain quiet for a while, but it’s clearly far from over. In fact, it is most likely the beginning, given the voices coming from Israel.
Even if it remains localized, there are concerns it will become much larger and more dangerous. That will continue to be a key reason for core bond yields not to drift too much higher from here. They are currently well below recent highs (more so in the US), and the sentiment of targeting 5% has waned.
There is a 4.5% risk to the 10-year bond, unless inflation data is high enough to trigger an upward reversal in yields.