New Normal for The 10 Year will be Around 4.5% Says Tom Orlik

Bloomberg's Jamie Rush, Stephanie Flanders and Tom Orlik have a new book on the future of interest rates publishing August 8th. It's called 'The Price of Money: A Guide to the Past, Present and Future of the Natural Rate of Interest', and it's a collection of essays by the Bloomberg Economics team. Tom Orlik joins to break down the future for the Fed as well as what the future for the 10 year treasury could be going forward.

Long-dated Treasury yields rose after an auction of 10-year notes drew weak demand and traders shifted their focus to the sale of 30-year bonds Thursday.

The benchmark 10-year yield were up about two basis point to 4.23% Wednesday afternoon, while shorter-dated tenors edged lower. The move followed soft demand for the $42 billion sale, the second of three auctions this week.

“The auction results were a little soft, but that’s not really too surprising considering the extent of the decline in rates since mid-July and especially since last Friday,” said John Canavan, an analyst at Oxford Economics.

A rally in the Treasuries market over recent weeks accelerated on Friday following after a jobs report showed weakness in the US labor market, prompting traders to add to wagers that the Federal Reserve is poised to cut interest rates as soon as next month. The 10-year yield is about 26 basis points lower than it was in mid-July.

The 10-year note auction result was 4.255%, about 1.1 basis points higher than indicated by its yield in pre-auction trading just before the bidding deadline, a sign that demand fell short of expectations. The so-called tail was the biggest since the year-earlier 10-year note auction missed by more than three basis points.

The US will offer $25 billion of 30-year bonds on Thursday.

Yields had hit session highs about 90 minutes before the auction in an unexplained surge that faded quickly.

The midday yield surge “may have spooked a few people going into the auction,” said George Catrambone, head of fixed income at DWS Americas. “An investor going into that auction that thought there was a lot of potential short interest, would want to be careful about their bid. It would explain some of the tepid demand today.”

At the same time, the tail meant that the new issue will have a coupon rate of 4.25% instead of the 4.125% it would have obtained if the auction yield had been lower than 4.25%, a feature that enhances its appeal investors.

Fed Speak

Rate-cut wagers — and short-maturity Treasuries — got some extra backing Wednesday from comments by Fed officials. Minneapolis Fed President Neel Kashkari said a slowing of the US economy may make a rate cut appropriate in the near term, and he still sees two cuts by year’s end. Fed Governor Lisa Cook said the revisions in July employment data could signal an inflection point for the US economy.

Swap contracts linked to Fed rate decisions are pricing in nearly 60 basis points of easing by year-end and about 85% of a move in September.

While 10-year notes have traded at lower yield levels this year — approaching 3.85% in early April — auctions take place once a month on a fixed schedule that’s independent from prevailing levels in the intervening weeks.

This week’s auctions conclude Thursday with a $25 billion 30-year

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