Ten-year Treasury yields inch higher ahead of $40 billion auction

Ipek Ozkardeskaya, senior analyst at Swissquote Bank, noted that the 10-year yield on Tuesday dipped below technical support levels despite  some Federal Reserve officials this week indicating that the central bank’s battle against inflation is not won yet and tightening could continue.

“[T]he market reaction to the latest comments from the Fed speakers was a thick and determined ‘whatever,’” she said.

“The U.S. 10-year yield fell below its 50-day moving average, the 2-year yield steadied below the 5% mark, and the gap between the two is widening again as the dovish Fed expectations swamp the marketplace following the soft U.S. jobs data released last week and the Fed’s decision to pause for another month,” Ozkardeskaya added.

Investors will be keen to see how the Treasury’s 1 p.m. auction of $40 billion of 10-year notes goes, particularly as it’s almost double the auction size for this duration for the decade preceding COVID, noted analysts at Saxo Bank.

“It will be interesting to see if investors are willing to extend the duration despite lower yields. While yield curves are now flattening, we remain constructive on steepeners in the mid and long-term,” Saxo said.

Fed officials slated to make comments on Wednesday, include Chair Jay Powell making opening remarks at a Fed research conference at 9:15 a.m.; Fed Bank of New York President John Williams giving the keynote speech at that conference at 1:40 p.m.; Fed Vice Chair for Supervision Michael Barr at the NAHB conference at 2 p.m.; and Fed Vice Chair Phillip Jefferson at the closing remarks at the research conference at 4:45 p.m..

Powell will also be making comments during a panel discussion on Thursday.

Before all that, markets are pricing in a 90% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on December 13th, according to the CME FedWatch tool.

The chances of a 25 basis point rate hike to a range of 5.50 to 5.75% at the subsequent meeting at the end of January is priced at 16%. The central bank is not expected to take its Fed funds rate target back down to around 5% until July 2024, according to 30-day Fed Funds futures.

U.S. economic updates set for release on Wednesday include wholesale inventories for September, due for release at 10 a.m. Eastern.