Treasury yields move higher as traders reflect on SOFR’s recent drive to record high

Daily Trade

Yields on 1- through 30-year U.S. Treasurys went higher on Tuesday as traders reflected on the factors that drove the Secured Overnight Financing Rate to a record high last week.

What’s happening

  • The yield on the 2-year Treasury
    BX:TMUBMUSD02Y
    jumped 8.9 basis points to 4.337%, from 4.248% last Friday. Yields move in the opposite direction to prices.

  • The yield on the 10-year Treasury
    BX:TMUBMUSD10Y
    rose 7.2 basis points to 3.932%, from 3.860% on Friday.

  • The yield on the 30-year Treasury
    BX:TMUBMUSD30Y
    advanced 5.5 basis points to 4.075%, from 4.020% on Friday.

  • Financial markets were closed on Monday for the New Year’s Day holiday.

What’s driving markets

Treasury yields rose on Tuesday, just days after SOFR hit 5.4% or its highest level since its launch in 2018. The rate is used to measure borrowing costs on loans between banks and others in the U.S. repurchase agreement market. One of the questions weighing on the bond market is whether the SOFR rate will settle back down, according to Tom di Galoma, co-head of global rates trading for BTIG in New York.

Meanwhile, tensions in the Middle East grew as an Iranian warship entered the Red Sea, boosting fears of supply disruptions after attacks on ships by Tehran-backed Houthi rebels.

In U.S. economic updates on Tuesday, S&P Global’s manufacturing purchasing managers’ index for December fell to 47.9 from 49.4 the prior month, a reflection of weakening demand. Construction spending in November rose for an 11th month in a row.

A raft of labor-market data is expected this week. The Labor Department’s Job Openings and Labor Turnover Survey is due on Wednesday, while the ADP private-sector jobs report for December and weekly initial jobless claims will be published on Thursday. Friday brings the nonfarm-payrolls report for December.

What strategists are saying

“The market got ahead itself by taking interest rates and the dollar sharply lower at the end of last year,” said Marc Chandler, chief market strategist at Bannockburn Global Forex.

Tuesday’s actions reflect “the unwinding of some of those moves,” Chandler said via phone. In addition, geopolitics is playing some role “and markets are nervous about it.”

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