U.S. Treasury bonds fell recently as expectations for Federal Reserve rate cuts over the next two years diminished. Following the 10-year Treasury auction, yields hit intra-day lows due to bid yields exceeding pre-issuance trading levels. Upcoming CPI data and the 30-year Treasury auction are anticipated to influence market movements further.
Yields across the curve increased by 4-6 basis points, with short- and mid-term yields experiencing the most significant rises. The 5s30s yield spread contracted by approximately 1.5 basis points. Short-term bonds underperformed due to reduced implied rate cut expectations in the swap market. A senior director at a trading firm projected only a 25 basis points rate cut by year-end.
Significant SOFR options activity highlighted market bets on limited rate cuts in upcoming Fed meetings, including one in November before a pause. A notable trade involved a $1.3 million February 2025 put spread, targeting increased yields.
The 10-year Treasury auction saw bid yields exceed pre-auction levels by 0.4 basis points, leading to further declines in long-term bonds. Primary dealers received 13.9% of the allocations, while direct bidder allocations fell to their lowest in nearly six years at 8.4%. Indirect bidders increased their share to 77.6%.
Options trades also focused on rising yields on longer-dated bonds, with bets on 5-year yields surpassing 4% and 10-year yields reaching over 5%. Large trades in ultra-long Treasury futures included multiple block purchases and a block sale.
Recent yield data include the 2-year at 4.0111%, 5-year at 3.9026%, 10-year at 4.0628%, and 30-year at 4.336%. The 5-year and 30-year yield spread stood at 43.17 basis points, while the 2-year and 10-year spread was 4.96 basis points.
