(Bloomberg) -- A selloff in US Treasuries showed few signs of abating on Wednesday, with securities falling for a third day amid a broad repricing of expectations for interest rate cuts by the Federal Reserve.
Yields advanced across maturities, with the benchmark 10-year rate reaching 4.26%, the highest since July. A rout in US stocks added to the pressure with investors now demanding the highest premium to hold longer-dated government debt in almost a year.
“People are worried about the bond market now,” said Suhail Shaikh, chief investment officer at Fulcrum Asset Management, which manages $7.7 billion. “The Fed had been priced too aggressively in markets in terms of rate cuts relative to what the economy really needed.”
Signs of a resilient US economy and stubbornly high inflation have also fueled the move. On Wednesday, the Fed’s Beige Book survey of regional business contacts showed activity was flat in most parts of the US since early September — and highlighed the angst surrounding the Nov. 5 elections. It contained around 15 references to the event as a source of uncertainty or a factor that was causing consumers and firms to delay investing, hiring and purchasing decisions.
Rising speculation rises in betting markets that former President Donald Trump will win the Nov. 5 vote has also helped push up yields as he’s seen as likely to stoke growth and inflation through an agenda of tax cuts and steeper tariffs.
Swaps prices reflect less than a 100% certainty that the central bank reduces rates at each of its two remaining policy meetings this year. The bond market is also trimming bets on the degree of Fed rate reductions over the next year. Traders will get more clarity next week on how much officials are likely to ease, with the release of a key labor-market reading for October.
The price of options that protect against an extended slump in Treasuries has soared to the highest this year amid concerns that losses may deepen. Treasuries have lost 2.1% this month through Tuesday, according to a Bloomberg index, following five months of gains.
“A lot of people had assumed: ‘Hey, the Fed started the cutting cycle, so yields are going down,’” said Kathryn Kaminski, chief research strategist and portfolio manager at quant fund AlphaSimplex Group. “And when that didn’t come to fruition, there’s repricing of those expectations.”
The firm’s systematic models remain net long Treasuries, though as the trend signals weakening during the recent selloff, those positions have been trimmed, Kaminski said.
“There’s been a little bit of a pendulum swing with a repricing of Fed expectations after the recent inflation data and strong labor-market data - so yields are selling off,” she said.
Yields remained higher after the Treasury department sold $13 billion of 20-year bonds, auction at a rate of 4.590%, the highest since May and above where the when-issued securities trades just as the bidding for the debt completed.
The slide in US government debt comes in contrast to a rally in short-term European bonds as traders add to wagers that the European Central Bank will lower rates by half a point in December to prop up the bloc’s flagging economy.
This diverging backdrop of heightened potential for more rapid rate cutting in Europe versus by the Fed has investors including Pacific Investment Management Co. and Vanguard favoring the debt.
--With assistance from Edward Bolingbroke.
(Updates pricing, adds detail on day’s moves throughout.)
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