US Treasury predictions: Will 2-year, 10-year, 30-year bonds hit historic highs soon? Details here

Two-year US Treasury yield, which typically moves in step with interest rate expectations for the Fed, was last up 2.4 basis points at 4.735 per cent. The yield on the benchmark US 10-year Treasury note was last up 0.2 bps at 4.988 per cent, while the yield on the 30-year bond was unchanged at 5.301 per cent. A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a positive 25.1 basis points. The spread narrowed to its flattest in about a month.

US Treasury yields mostly edged higher on Tuesday, moving within narrow ranges as investors weighed the outlook for interest rate hikes ahead of Wednesday's Federal Reserve decision. The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.461 per cent after closing at 2.455 per cent on Monday. The 10-year TIPS breakeven rate was last at 2.351%, indicating the market sees inflation averaging about 2.4 per cent a year for the next decade.

Trading was subdued after recent market volatility. US bond prices jumped last week, pushing yields lower, as concerns about the sustainability of the AI boom triggered a selloff in stocks and made safe-haven bonds more attractive. The benchmark 10-year yield last Thursday had its biggest one-day drop in nearly four years as stocks dropped. It was up slightly on Tuesday but below the 5 per cent mark.


"It seemed like the narrative started to flip a little bit more towards potential growth scare concerns," said Thomas Simons, chief US economist at Jefferies. But "the economy is still in fairly good shape. The risks to higher inflation are more pronounced than what you might think given where the market is expecting the Fed to go."

In the short term, "I wouldn't be surprised to see the little rally that we've had in the long end kind of backs itself back up again," he said.

The Fed is widely expected to leave interest rates unchanged when it announces its policy decision at the conclusion of its meeting on Wednesday. Still, investors do not believe a pause in rate increases will last for long given lingering inflation concerns.

The US central bank raised rates in September for the first time in three years in an effort to combat higher inflation. Oil prices were lower on Tuesday, but higher oil driven by the US-Israeli war with Iran has sparked inflation concerns and lifted yields.

An auction of $70 billion 5-year notes offered mixed results. The auction was priced at a yield slightly above the rate indicated at the bid deadline, a sign investors demanded a concession to take down supply. The bid-to-cover ratio, another measure of demand, was slightly higher than the last auction.

"The market's just fighting with supply and with the Fed and the ECB both meeting this week. It's probably going to be a hawkish tone out of both central banks," said Tom di Galoma, managing director at Mischler Financial Group. "I don't think that there's a lot of risk-taking going on from dealers."

Market expectations for a rate increase from the Fed this week have fallen as yields have eased more recently and economic data has been mixed. As of Tuesday, rate futures were pricing in about a 93 per cent chance that rates would stay on hold this week, CME FedWatch data showed. At the same time, they were pricing in a roughly 75 per cent chance of a quarter-point rate hike in December.

A European Central Bank rate decision is due on Thursday, with policymakers expected to keep borrowing costs steady. US durable goods orders pushed US yields up early. The data showed new orders for key US-manufactured capital goods increased in September, suggesting the AI-driven spending boom continues.

Investors increasingly are scrutinizing the sustainability of debt-funded AI spending amid rising borrowing costs while also looking for evidence that the sector's massive investments are resulting in growth.

Meta Platforms became the center of the selloff in stocks last week after the operator of social media networks and major AI investor said in its earnings report that it would create a new class of shares in part to raise money for further capital spending. Investors took that as evidence that the next leg of the AI buildout will be costly for shareholders.