Just as many investors were bracing for more upward pressure on interest rates to extend one of the more aggressive, bond market selloffs in years, yields on longer-dated U.S. Treasury notes (USTs) abruptly reversed course this week given the outbreak of war in the Middle East and some unexpectedly dovish comments by a growing number of Federal Reserve policymakers. Indeed, yields on longer maturity USTs have surged higher over the past five weeks, with 10-year USTs up nearly 70 basis points from the end of August to 4.80% by last Friday, the highest level since 2007, driven by the rapidly deteriorating fiscal landscape, resilient economic data and broader-based acceptance that the FOMC will indeed follow through on their steadfast commitment of ‘higher for longer’ regarding short term interest rates. This higher rate momentum abruptly reversed post last Friday’s red-hot, Non-Farm Payroll employment data (336k vs. 170k est.), triggered by the outbreak of fighting in Israel and Gaza over the weekend and, perhaps more significantly, a perceptible shift by FOMC policymakers away from how much more restrictive policy should be to how long today’s restrictive stance should be maintained.
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