10-Year Treasury Yield Hits 4.683%, Highest Since 2007, as Bond Market Flashes Warning Signs

The U.S. Treasury sold $42 billion in 10-year notes on Wednesday at a high yield of 4.683%, according to Reuters. That's the highest yield at a 10-year auction since 2007, per DRW Trading Group economic strategist Lou Brien, who called demand for the paper "solid" but flagged the yield level as a signal of investor unease.

The bid-to-cover ratio, a gauge of demand, slipped to 2.53 from 2.59 at the prior sale, according to BigGo Finance. Indirect bidders, mostly foreign central banks and overseas institutions, took 76.73% of the offering, showing that international appetite for U.S. debt hasn't collapsed. But the softer bid-to-cover number suggests enthusiasm is fading at the margins.

A day earlier, the Treasury sold $58 billion in 3-year notes at a high yield of 4.291%, up from 4.179% at the prior auction, with bid-to-cover actually rising to 2.71 from 2.60, BigGo Finance reported. Short-term paper is holding up better than long-term paper. The bond market is pricing greater confidence in the next year or two than in the next decade.

The Inflation Number That Didn't Scare Anyone, Yet

July's Consumer Price Index rose 0.1% after a 0.4% drop in June, with annual inflation slowing slightly to 3.4% from 3.5%, according to Reuters. Core CPI, which strips out food and energy, rose 2.5% year-over-year, down from 2.6%. Rate futures markets trimmed the odds of a September Fed hike to 38% from 48% the day before.

That's mild news. But mild inflation data landing next to a 19-year-high Treasury yield reflects something broader: sustained deficits, sticky long-run inflation risk, and a government that keeps issuing debt regardless of what the data says.

Lacy Hunt Just Flipped

Lacy Hunt, chief economist at Hoisington Investment Management, has argued for bond yields to fall for nearly four decades, according to ZeroHedge. He built his career, and his firm's returns, on the bet that debt and globalization would keep inflation and rates low.

Hunt just reversed course. In Hoisington's Second Quarter Review and Outlook, titled "Capital Scarcity and the End of Globalization's Disinflationary Era," Hunt and partner Van Hoisington wrote that the long-run inflation equilibrium is "migrating from roughly 1.5–3.5% toward 3.5–4.5%, with a significant risk of episodes of inflation above 5%." They backed the call with money, sharply cutting bond duration in client portfolios and moving proceeds into Treasury bills, per ZeroHedge.

When someone who's been right about falling rates since the 1980s changes his mind, the shift carries weight whether you agree with him or not.