Treasury yields rise ahead of closely-watched 10-year auction and FOMC minutes

• Markets are pricing in a 78% probability that the Fed will hold rates steady at its next meeting, following the first rate increase since 2023 in September
• The $39 billion 10-year Treasury auction will test investor appetite amid concerns about inflation, debt levels, and term risk premiums
• Tuesday's 3-year auction showed solid demand with a slight stop-through, breaking the previous streak of auction tails for coupon securities

Summary

Market Movement:

U.S. Treasury yields climbed Wednesday following a previous session retreat. The 10-year note yield rose 3 basis points to 5.307%, the 30-year bond increased 4 basis points to 5.69%, and the 2-year note gained 1 basis point to 4.801%. One basis point equals 0.01%.

Key Events:

Investors focused on two major catalysts:

• FOMC Minutes Release: Scheduled for 2:00 p.m. ET, providing insights into Federal Reserve monetary policy decision-making following September's rate hike—the first since 2023
• 10-Year Treasury Auction: $39 billion offering testing investor appetite amid inflation concerns, elevated debt levels, and term risk premium

Market Sentiment:

Bond yields have sold off over the past six weeks due to inflation worries and rising energy prices. CME data shows traders pricing in a 78% probability the Fed will maintain rates unchanged at its next meeting.

Auction Outlook:

BMO analysts noted Tuesday's 3-year auction showed solid demand, "stopping through slightly" without the previous negative tail pattern. However, they emphasized Wednesday's 10-year auction carries significantly more weight for U.S. rates direction, expecting investors to demand a "significant" auction concession.

Market Implications:

The 10-year auction will serve as a critical test of investor appetite at current yield levels. Results could signal whether yields have reached attractive enough levels or if further premium is required to compensate for inflationary and fiscal concerns, potentially influencing Fed policy expectations and broader market direction.