A weekslong selloff in U.S. government bonds intensified on Tuesday, as the yield on the 10-year Treasury note wrenched clear of the 3% level that has for months acted as its ceiling.
The yield on the benchmark 10-year U.S. Treasury note settled at 3.048%, its highest level since May 22, compared with 3.001% Monday.
Yields, which rise when bond prices fall, first declined but then climbed along with global stocks after the Trump administration said late Monday that a 10% tax would be imposed on Chinese goods starting Sept. 24, with the rate rising to 25% at the end of the year.
Reflecting demand for riskier assets over safer ones, yields continued to rise even after China said Tuesday that it would retaliate by imposing tariffs on $60 billion of U.S. goods.
“Seemingly, there was an expectation that the tariffs that were going to be implemented were going to be at the higher 25% rate, and they’re initially at 10%, so I think there’s some relief reaction to that,” said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co.
The U.S. Treasury building. Investors may sell Treasurys to make room in their portfolios for the large amount of corporate debt being sold this week. Photo: Andrew Harrer/Bloomberg News
Another factor putting pressure on Treasurys is the large amount of new corporate debt being sold this week, analysts and traders said. When businesses sell new bonds, investors often respond by selling Treasurys to make room in their portfolios or hedge their exposure to rising interest rates.
Tuesday’s selling marked a break from a recent pattern, in which a 3% 10-year yield brought strong demand from investors. The yield’s next major milestone would be reaching its 2018 closing high of 3.109%, set on May 17.
The 10-year Treasury yield is of great importance to the global economy, serving as benchmark for a range of interest rates used by consumers, businesses and governments. Its difficulty rising above 3% this year has ensured that overall credit conditions in the U.S. remain relatively favorable for borrowers, even as the Federal Reserve has steadily raised short-term interest rates.
In recent months, Treasury yields have been simultaneously buoyed by optimism about the U.S. economy and constrained by concerns about the outlook elsewhere in the world, especially in an environment of unsettled global trade relations.
Given the strength of U.S. economic data and the Fed’s commitment to raising rates, some investors have believed it was only a matter of time before the 10-yield broke through the top of its recent trading range.
Many, however, also say it will be difficult for yields to rise much higher from here without a meaningful increase in inflation, which is a main threat to bonds because it erodes the purchasing power of their fixed returns.
Write to Sam Goldfarb at [email protected]