The bond market may have come to an important turning point, which means the fourth quarter could be a time of higher interest rates.
Treasury yields, which move opposite price, found a few good reasons to move higher in the final days of the third quarter. The 10-year yield was at 2.33 percent on Friday, after hitting 2.35 percent Thursday, its highest level since July. The 2-year was at 1.47 percent Friday, off from Thursday's 1.49 percent, a fresh nine year high.
Strategists say there were three big factors at work.
One is that the Fed is on a tighter policy course, and the market now gives it better than 70 percent odds for a December rate hike. Fed Chair Janet Yellen reminded investors of that Tuesday when she reaffirmed the Fed's goal of normalizing rates and called the lack of inflation a 'mystery.'
The Fed, following its meeting Sept. 20, announced a program to reduce its balance sheet, a major tool it used for extraordinary policy easing, in a final step away from financial crisis era programs.
The second is that the Fed is not alone in moving away from extraordinary policy, and as U.S. Treasury yields rose this week, global yields went higher too. Other central banks are also leaning toward tightening, including the European Central Bank which is expected to announce in October that it will slow its own bond purchases.
Third, the Trump administration and Congressional leaders unveiled a tax plan that the market believes will result in a bigger deficit and more debt, two things that would push up interest rates.
Reference:CNBC
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