U.S. 10-year Treasury yield climbs to 5.349% amid inflation data and European political turmoil

The Treasury will auction $58 billion of three-year notes, $39 billion of 10-year notes and $22 billion of 30-year bonds from the 6th to the 8th.

A surge in the U.S. fiscal deficit driven by tax cuts and military spending on the war with Iran is a major factor in rising yields; as deficits roll into debt, the supply of Treasurys keeps growing.

The CME FedWatch tool puts the probability of one Fed rate increase by year-end at 67.8% and of two increases at 18.8%.

Earl Davis, head of fixed income at BMO Asset Management, told Bloomberg TV that a 30-year Treasury yield above 6% is "inevitable" and likely this month.

The ISM September services PMI fell 0.5 point to 54.9, but its prices index hit 74.0, the highest since July 2022; it was released the same day.

The U.S. 10-year yield rose to 5.310% from Friday's settlement of 5.276%; the 30-year edged up to 5.664% from 5.629%.

French 10-year yields rose as high as 4.925% before settling at 4.865%, little changed from Friday and near a 24-year high reached last week.

The two-year yield, more reactive to expectations of Fed rate moves, rose to 4.831% from 4.823%.

Investors worried that the French government's recent budget proposal will struggle to be approved by a fragmented parliament.

Britain's 30-year gilt yield rose as high as 6.020% on the 1st, the highest since 1998, the first time a G7 country's long-term yield topped 6% since Italy in 2012.

The 10-year German Bund yield settled at 3.492%.

This week's Treasury coupon auctions total $119 billion.

The 10-year yield rose about 7.3 basis points from Friday's settlement to Monday's intraday high.

"In European government bond spreads, we would not attempt to catch the falling knife yet, as an agreement on the French budget is a long way off and the European Central Bank is unlikely to act on spreads yet,"

Spanish Prime Minister Pedro Sanchez called snap elections for Nov. 29 following protests against high housing costs; recent polls suggest a right-wing coalition of the People's Party and the anti-immigration Vox party.

Spanish 10-year yields settled at 4.136% after hitting 4.219% on Friday, the highest since December 2013.

The U.S. Treasury filled its $6 billion buyback cap for the first time since expanding the program last month; in a buyback of 10- to 20-year notes and bonds on the 1st it received $46.39 billion in offers and bought $6 billion.

In the Dow Jones snapshot the two-year rose 0.8 basis point while the 10-year rose 3.4 basis points.

The French-German 10-year spread at Monday's settlements was about 1.37 percentage points.

Spain's 10-year yield settled about 8 basis points below Friday's peak.

Buyback offers were about 7.7 times the cap; the Treasury accepted roughly 13% of offers.

About $40 billion of offered 10- to 20-year bonds were not bought back.

The $6 billion bought back is about one-twentieth of this week's auction supply.

With U.S. Treasury yields already elevated by the country's massive national debt, the troubles coming out of Europe are serving as additional kindling.

Wall Street sees little immediate risk that Europe's weakness will spread to the scale of the 2009-2012 debt crisis; analysts say European instability alongside the U.S. midterm elections could amplify bond market volatility in the near term.

France's 10-year yield climbed to 4.963% on the 1st, the highest since 2002, and its spread over German bunds widened to 1.4 percentage points, the widest since the European debt crisis.

In July, Morgan Stanley forecast that AI-related corporate bond issuance would more than double from last year to $570 billion this year.

The Wall Street Journal reported that Italian and Greek yields jumped as hedge fund arbitrage positions built up in European government bonds were unwound all at once.

Net selling of U.S. Treasurys by South Korea, Japan and European countries to defend their own currencies has become another main driver of the rise in yields.