US Treasury yields pulled in opposite directions on Monday, as traders juggled competing forces: a flight to safety from last week's stock selloff, rising odds of another Federal Reserve rate hike, and a heavy calendar of government debt sales. The moves come ahead of key inflation data that could set the tone for markets into year-end.
What's driving yields
Treasury yields are essentially the interest rates the US government pays to borrow money, and they move based on two big forces: expectations for where the Fed sets short-term rates, and how much risk investors want to take. When investors are nervous, they often buy Treasuries as a safe haven, which pushes prices up and yields down. When they expect the Fed to keep rates higher, yields tend to rise.
Last week, a steep drop in stocks briefly pushed investors into Treasuries, but a stronger-than-expected October jobs report revived the idea that borrowing costs could stay higher for longer. That report, which showed solid job growth, led markets to price in an 81% chance that the Fed will raise its benchmark rate at its December meeting, according to fed funds futures.
Now the next test is October inflation. Tuesday's consumer price index (CPI) and Friday's producer price index (PPI) will shape whether markets keep pricing in that December hike. Fed officials' comments in the coming days could add noise around the edges, but the data will be the main driver.
The supply factor
At the same time, supply matters. The US Treasury plans to auction $125 billion of "coupon" debt—notes and bonds that pay regular interest—this week, including $42 billion of 10-year notes on Tuesday and $25 billion of 30-year bonds on Thursday. The week is shortened by the Veterans Day market closure on Friday.
When a lot of long-dated paper hits the market at once, yields can stay jumpy until buyers absorb it. Big auctions can move rates simply because dealers and investors need compensation to take down a sudden wave of supply. That usually shows up as an "auction concession"—slightly lower bond prices and, therefore, higher yields—heading into the sales.
This effect tends to be strongest in longer maturities, because 10- and 30-year bonds swing more when yields change. So even if the 2-year yield stays anchored to expectations for the Fed's next move, the 10-year and 30-year can stay choppy, shifting the gap between them and the 2-year (the 2s/10s curve) until the auctions clear.
What it means for investors
For everyday investors, the back-and-forth in yields matters for a few reasons. First, higher Treasury yields tend to weigh on stocks, especially growth and technology shares, because they make future earnings less valuable and offer a safer alternative return. That dynamic was visible last week when a hot jobs report pushed yields up and hit equities.
Second, yields influence borrowing costs across the economy. Mortgage rates, auto loans, and corporate debt all tend to move with Treasury yields, so a sustained rise could tighten financial conditions further.
Third, the auction calendar can create short-term volatility in bond prices, which affects bond funds and ETFs that hold long-dated Treasuries. Investors with exposure to those funds should be prepared for some choppiness this week.
As always, the key is to focus on the data. If CPI comes in hot, expect yields to rise and stocks to feel pressure. If it comes in cool, yields could fall and equities could get a breather. Either way, the next few days will be telling.
