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Bond Report: Treasury yields post their largest multi-quarter gains since the 1980s

Treasury yields finished the New York session on Friday with their biggest multi-quarter rise in at least a quarter-century, as investors positioned for aggressively higher interest rates this year.

What’s happening

The yield on the 2-year Treasury
TMUBMUSD02Y,
4.253%

rose 3.8 basis points to 4.206% from 4.168% on Thursday. It rose 128.1 basis points in the third quarter, and is up 408.7 basis points over the last seven quarters. That’s the largest seven-quarter rise since 1982, based on 3 p.m. levels, according to Dow Jones Market Data.

The yield on the 10-year Treasury
TMUBMUSD10Y,
3.814%

rose 5.5 basis points to 3.802% from 3.747% as of Thursday afternoon. It rose 82.9 basis points during the third quarter.

The yield on the 30-year Treasury
TMUBMUSD30Y,
3.778%

advanced 6.9 basis points to 3.762% from 3.693% late Thursday. It rose 64.1 basis points over the quarter.

During the last three quarters, the 10-year rate is up 230.6 basis points and the 30-year yield is up 187.4 basis points. Those are the largest three-quarter gains since 1987, according to Dow Jones Market Data.

What’s driving markets

Investors continued to fret about the economic impact of aggressive interest rate hikes by the Federal Reserve, aimed at curbing the hottest inflation of the past four decades. In comments made at a conference in New York, Fed Vice Chair Lael Brainard said policy makers won’t pull back from rate hikes prematurely and that it will take time for high interest rates to bring inflation down.

Data released on Friday only underscored her point. While the personal consumption expenditure gauge of U.S. inflation rose a mild 0.3% in August, another measure that omits volatile food and energy costs jumped 0.6% last month — above Wall Street’s 0.5% forecast for the so-called core PCE — in a more worrisome sign.

The rate of inflation over the past year slowed to 6.2% from 6.4% in the prior month. However, the core rate of inflation in the past 12 months climbed to 4.9%.

After factoring in high inflation, consumer spending barely rose last month, data showed Friday. Meanwhile, Americans remain broadly pessimistic about the economic outlook.

Quarter-end rebalancing flows are estimated to have resulted in about $23.5 billion moving out of equities and into fixed income, according to BofA Securities strategists.

What analysts are saying

“It’s the end of the week, month, and quarter – not a moment too soon. The series of repricings that have occurred since the September 21 FOMC rate hike suggest that the start of the fall was the start of the fall,” said BMO Capital Markets rates strategists Ian Lyngen and Ben Jeffery.

“The macro narrative has quickly shifted from policy makers’ focus on inflation as public enemy number one toward a not-so-quiet resignation to the fact tighter global monetary policy is not only unavoidable but poised to err on the side of demand destruction,” they wrote in a note.

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