Yields on U.S. Treasurys, eurozone government bonds and U.K. gilts rose in European morning trade on Wednesday, as investors focus on the Federal Reserve's interest-rate decision as well as the U.K. budget.
The 10-year Treasury yield increased 1.8 basis points to 5.010% and the 10-year German Bund yield rose 1.9 basis points to 3.370%, while the 10-year U.K. gilt yield was up 2.5 basis points at 5.366%, according to Tradeweb.
The Fed is widely expected to leave interest rates unchanged but raise them in the coming months. Money markets priced in a 91% probability of unchanged interest rates by the Fed on Wednesday but almost fully priced a hike in December, according to LSEG.
"A strong economy faces signs of a weakening labor market, as evidenced by recent payrolls and employment creation numbers. This backdrop supports a wait-and-see approach," said Joan Feldbaum-Vidra, global head of sovereigns at KBRA.
Additionally, normalized oil flows out of the Middle East tend to support medium-term compression of oil prices, although the risk of an escalation in the conflict after the U.S. midterm elections is keeping oil prices elevated, she said. Large-scale borrowing by AI companies and the U.S. Treasury are keeping yields high, helping do the Fed's job, Vidra added.
The Fed is likely not yet done with raising interest rates, analysts said.
"Patience should not be confused with complacency," said Alessia Berardi, head of global macroeconomics and emerging markets strategy at Amundi Investment Institute in a note. In line with the market, Amundi expects the Fed to keep interest rates on hold.
"Admittedly, the labor market now looks less strong and market rates remain high," she said. "However, the inflation outlook has not changed, so the Fed still has accommodation to remove."
Bond investors will also focus on the U.K. budget due around 1230 GMT and the Debt Management Office's 2026-2027 financing remit, which will be released after that.
"Investors expect this Wednesday's budget to keep consolidation on course," Andrew Wishart, senior U.K. economist at Berenberg, said in a note.
This will be the first budget under Prime Minister Andy Burnham and Treasury chief John Healey, who have said they intend to stick to the U.K.'s fiscal rules. The budget is expected to contain only moderate measures which shouldn't upset gilt markets.
"All signs point to a cautious budget that leaves the bond vigilantes with little to do," Ebury's head of market strategy Matthew Ryan said in a note.
Meanwhile, investors are starting to look ahead to the Treasury's quarterly refunding announcement next week.
Given the recent strong bond selloff which saw the 10- and 30-year Treasury yields surging to 24-year highs earlier in October, any potential signal that the Treasury would adjust long-end issuance to reflect lower demand will be watched.
The Treasury's questionnaire for primary dealers ahead of the refunding announcement, asking their perspectives on structural changes in investor demand and expectations for future auction sizes, was an important step toward advancing the discussion around upcoming adjustments to Treasury issuance, Deutsche Bank strategists said in a note.
The strategists' analysis of Treasury holdings data and portfolio weighted average maturity metrics suggests that "there has been a retrenchment in demand for long-dated Treasurys," they said. This has been driven by a shrinking pool of buy-and-hold portfolios and a shift in preferences toward shorter maturities, they said.
As Treasury faces higher borrowing needs over the coming years, and with the weighted average maturity in the market near historical highs providing some flexibility, "there is a compelling case for more proactively shortening the maturity profile of future issuance," they said.
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