US Treasury yields, Oct 21: long end falls to 5.42% while bills still price a Fed hike

Long-term yields have fallen from their early-October highs and the curve has flattened

Treasury yields are the interest rates the US government pays to borrow. They set the base for mortgage and corporate borrowing costs. Data from the Federal Reserve's H.15 release of selected interest rates show these moves:

• The 30-year yield fell from 5.67% on Oct 7 to 5.42% on Oct 21.
• The 10-year yield fell from 5.31% on Oct 5 to 5.13%.
• The gap between the 2-year and 10-year yields narrowed from about 47 basis points (bp, hundredths of a percentage point) on Oct 5 to 32bp.
• The gap between the 2-year and 30-year yields narrowed from about 90bp to 61bp.

Short-term rates still point to at least one Federal Reserve hike soon

The 3-month Treasury yield was 4.25% and the 1-month yield 4.09%. Both sit above the 4.00% primary credit rate, which the Federal Reserve charges banks for short-term loans. The effective federal funds rate, the average overnight rate banks charge each other, held at 3.88% every day. The 2-year yield has stayed between 4.74% and 4.84% all month.

Falling real yields, not lower inflation expectations, explain the decline

The 10-year yield on Treasury inflation-protected securities (TIPS) slipped to 2.76%. That puts the implied 10-year breakeven inflation rate near 2.37%. The breakeven rate is the inflation rate the market expects. It is about where it was at the start of October.

Moves on Oct 21 itself were small

No yield moved by more than 2bp on the day. The 10-year rose 1bp to 5.13% and the 2-year rose 2bp to 4.81%. The 5-year was 4.95% and the 30-year was unchanged at 5.42%. The prime rate that banks charge on short-term business loans stayed at 7.00%.