Treasury yields are lower after reaching multiyear highs, traders weigh latest bond auction

The Dollar Index remained flat at 102.50 on Monday, Wednesday, and Thursday. Fed Governor Waller's suggestion for additional rate hikes on Thursday did not move the index further. The index currently trades around 102.30, within the range it has been in since October 1. A 10-year Treasury yield near 5.30% and further declines in European government bonds contributed to this stability.

On September 16, the Fed increased rates to 3.75%-4.00% unanimously, and the minutes from the meeting suggested more increases by year-end, with nearly all policymakers anticipating higher inflation risks. Fed Governor Waller stated on Thursday that more hikes may be necessary to bring inflation back to the 2% target sooner, emphasizing that they do not need to occur in consecutive meetings.

He noted that inflation has been above the Fed's target for nearly five and a half years and expressed limited concern about higher rates slowing the economy, attributing the pressures to higher technology prices from AI development and potential new tariffs. The two-year Treasury yield is near 4.80%, 0.80 points above the Fed's range.

Futures prices indicate a 20% chance of a rate hike at the October 27-28 meeting and nearly an 80% probability for the December 8-9 meeting. The Euro accounts for 57.6% of the Dollar Index, and its highs on Monday, Wednesday, and Thursday coincided with the Euro's lows against the Dollar, all within the same quarter-hour, each time just above 1.1150.

A break below 1.1150, the Euro's weakest level since May 2025, would push the index above 102.50. The next significant level would be its May 2025 low just above 1.1050. The Euro's support is currently at 1.1150, and if it dips below this, the index could reach 102.50. The next support level for the Euro is its May 2025 low of just above 1.1050.

France's 10-year yield is near 4.90%, compared to Germany's 3.50% and the two-decade high in Italy and Greece above 5%. French government debt is influencing the Euro's weakness, as France's 2027 budget aims to reduce the deficit to 5% of national output. The economic assumptions behind this budget are considered optimistic by fiscal watchdogs.

Unions have threatened another strike on October 13, and German Finance Minister Klingbeil has discussed bonds with his French counterparts. The European Central Bank (ECB) is expected to raise rates twice more by March 2027, limiting the widening gap between US and euro-area rates. Brent crude oil prices are rising, and the Euro, which dominates crude oil imports in the Eurozone, has remained within its range.

Governor Waller suggested that the recent inflation rise could increase households' and businesses' expectations of future inflation. The University of Michigan survey, released on Friday, shows one-year inflation expectations at 4.6% and five-year expectations at 3.4% in September. The New York Fed's survey, published on Wednesday, reported one-year expectations at 3.9% in September, up from 3.6% in August.

Jobless claims were reported at 197K on Thursday, matching expectations, indicating a stable labor market and suggesting that inflation is the primary driver for an earlier rate hike.