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Bond Report: 10-year Treasury yield holds at five-month high following 20-year auction and Beige Book

U.S. Treasury yields were mixed on Wednesday, with the 10-year rate remaining at a five-month high of 1.64% following Treasury’s 20-year auction and the Federal Reserve’s Biege Book report.

A “sloppy, off-base market” obtained premium yield at the auction, according to FHN Financial’s Jim Vogel.

Meanwhile, the Fed’s account of business conditions in its 12 districts showed that most parts of the country reported “significantly elevated prices.”

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What are yields doing?

The 10-year Treasury note yields
TMUBMUSD10Y,
1.661%

1.635%, versus 1.634% at 3 p.m. Eastern Time. It was the highest yield since May 19, based on 3 p.m. levels, according to Dow Jones Market Data. It briefly rose above 1.65% after the auction, and has risen for four straight trading days. That’s the longest winning streak since Sept. 29.

The 2-year Treasury note rate
TMUBMUSD02Y,
0.387%

fell 1.8 basis points to 0.373%, down from 0.391%. It’s fallen for two consecutive trading sessions, and had the largest two-day decline since June 10.

The 30-year Treasury bond rate
TMUBMUSD30Y,
2.134%

rose 2.4 basis points to 2.111%, up from Tuesday’s 2.087% level. It was the highest yield since Oct. 8.

What’s driving the market?

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The $24 billion auction of 20-year TreasurysBX:TMUBMUSD20Y was awarded at 2.1%, in contrast to the when-issued yield of 2.077%, according to FHN’s Vogel. Ben Jeffery of BMO Capital Markets called the auction “soft,” and said the sale resulted in modestly higher yields.

Meanwhile, Dow industrials
DJIA,
+0.43%

and the S&P 500
SPX,
+0.37%

held onto gains after the release of the Fed’s Beige Book, which indicated that the U.S. economy was growing at a “modest to moderate rate” amid a low supply of workers and elevated prices.

Fed Governor Randal Quarles, appearing at the Milken Institute Global conference on Wednesday, said he sees “significant upside risks” to forecasts that inflation will decline sharply next year. He also said that he will support the decision at the Fed’s next meeting in November to start tapering asset purchases. Quarles stepped down from his role as vice chairman for supervision at the central bank last week, but he remains part of the Financial Stability Board until at least December.

Later Wednesday, San Francisco Fed President Mary Daly will be a part of a fireside chat at a symposium of central banking at 8:35 p.m.

Investors are particularly attuned to the prospects of a potentially faster pace of tapering, which would suggest that the central bank may be inclined to raise interest rates faster than expected to quell intensifying pricing pressures.

As a result, the market-implied odds of the Federal Reserve committing a policy mistake have jumped to around 40% from just under 25% two weeks ago, according to an analysis of the eurodollar curve done by Credit Suisse.

Read: Inflation ‘single biggest threat’ to markets and ‘society in general,’ says investor who called stock-market crash in 1987

What analysts are saying

Wednesday’s 20-year auction “was even sloppier than the oft-referenced February 2021 new issue that had previously been known as the weakest on record,” said Jefferies LLC economists Thomas Simons and Aneta Markowska. Despite a “terrible auction,” “the issue continues to trade well on the curve and has more room to run.”

Meanwhile, “the Beige Book’s descriptions of growth, employment and inflation are generally a bit more optimistic than what we saw in the prior rendition of the Beige Book,” they said.

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