Treasury yields are testing some of the highest levels in more than a year on Tuesday, as investors brace for a series of labor market data while parsing mixed signals on peace talks between Washington and Tehran.
Bond markets have undergone a major reset over the past five weeks, adding around 33 basis points to 10-year note yields as investors bet on the likelihood of Federal Reserve rate hikes while tracking stronger-than-expected economic data, higher global crude prices, and renewed inflation pressures.
Benchmark 10-year notes traded as high as 4.716% early Tuesday, just a tick or two away from their highest levels in 18 months and some 75 basis points higher than just before the launch of the U.S. war on Iran in late February.
Longer-dated 30-year bonds, meanwhile, are trading at 5.253%, testing the highest levels since 2007, having added a staggering 37 basis points since the end of June.
Both yields eased, however, following comments from Treasury Secretary Scott Bessent that the Strait of Hormuz could open for shipping traffic as early as Wednesday.
Shorter-dated two-year yields, meanwhile, have fallen eight basis points over the past week following Fed Chairman's Kevin Warsh post-meeting press conference last week.
"While the decline in short-dated yields reflects a more dovish near-term policy outlook, the rise in long-end yields signals growing concern that Warsh may prove unwilling to act aggressively enough should inflation remain elevated," said Seema Shah, chief global strategist at Principal Asset Management. "The bond market is effectively testing the Fed's credibility."
This week's slate of labor market readings, starting today with the JOLTS report on job openings and wrapping up Friday with the July employment report, will likely determine whether the test remains firm heading into next month's Fed meeting in Washington.
What may be more concerning, however, is the fact that Treasury yields are moving higher despite last week's coordinated intervention by the U.S. and Japan to support the yen.
The currency, which has been in free fall for much of the year and reached its lowest levels against the dollar in nearly 40 years last week, was helped by sales of euros from the U.S. Treasury.
That move was, in part, because Japan had been selling its Treasury bondholdings, the largest in the world, adding upward pressure to U.S. yields.
"Treasury Secretary Bessent has no interest in adding any kind of negative pressure on treasuries when the cost of financing U.S. debt is near/at record levels of GDP," said John Hardy, global head of macro strategy at Saxo Bank.
"Bessent was also at pains to point out that Japan could access the Fed's [Foreign and International Monetary Authorities] repo facility to intervene, posting its treasuries as collateral to obtain U.S. dollars to sell rather than selling its treasuries holdings in the open market."
Tuesday's moves higher suggest the Japan influence, which is now likely capped by the fact that it can use $60 billion of the Covid-era facility to pledge bonds, get cash and avoid outright Treasury sales, is not the only factor driving the selloff in U.S. debt.
Bond market volatility, meanwhile, is sharply on the rise, with the Merrill Lynch Option Volatility Estimate, better known as the MOVE index, trading near the highest levels since mid-May.
Developments in the war with Iran are likely a factor, as well, with global crude prices retracting a good portion of Monday's decline to trade at $85.66 a barrel as President Donald Trump warned of a "last chance" in peace talks and Tehran denied it was participating.
Stocks have largely plowed through the recent rise in bond yields, with the S&P 500 gaining 3.3% from late June, just around the time benchmark 10-year notes began their accelerated slump, and the Nasdaq Composite rising 2.4%.
But this week's ongoing slide, particularly in the wake of a noted intervention from the Treasury, could test that. And stronger jobs data, and renewed war tensions, could drive yields even higher.
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