10-Year Closes at Highest Level Since 2007

Rates break through resistance, hit 15+ year highs. Swap rates and UST yields continued their historic sell-off today after a brief hiatus on Friday, with both nominal and real yields stretching past decade-plus highs. The 10-year UST yield closed 8bps higher at 4.34%, continuing a 16-year high, while the 2-year yield finished above 5%. Meanwhile, the yield on 10-year TIPS (inflation-protected securities) exceeded 2% for the first time since 2009, a steep rise from 2023 lows near 1%.

The real-yield story. The significant rise in real (inflation-adjusted) yields illustrates the markets’ broader expectation for higher Fed policy rates and/or better economic growth. Conversely, the rise in UST yields and swap rates has little to do with a shift of inflation expectations. Implied probabilities for incremental 25bp rate hikes have remained low, currently at ~35% by the end of November’s FOMC meeting. This suggests that the “higher for longer” narrative has gained steam; however ~100bps of cuts remain priced in by the end of 2024.

Chinese central bank chooses confidence over stimulus. China’s key 5-year mortgage reference rate was held at 4.2% today, while the 1-year equivalent was lowered by 10bps from 3.55% to 3.45%. The cuts were below expectations given recent property market troubles, and were surprising given last week’s shock cut to a Chinese policy rate. The People’s Bank of China noted in a report last week that it faces the challenge of lowering rates to stimulate the economy while also maintaining the banking system’s stability and confidence in the economy. Some analysts point to the hold, however, as a clue that Beijing may be planning more direct support measures for the property sector. Overall, the troubles in the world’s second largest economy threaten to spill over into the broader economy, and markets are searching for any clues as to the measures China may take to stem an economic meltdown.