Treasuries Erase Nearly All October Gains. The Market Is Reacting to Powell.

A statue of Albert Gallatin, former U.S. Treasury secretary, stands outside the Treasury building in Washington, D.C. (Al Drago / Bloomberg)

Key Points

• U.S. government debt sold off, with the 10-year Treasury yield reaching 4.112%, nearly erasing October’s gains.
• Federal Reserve Chair Jerome Powell’s comments on future interest-rate cuts shifted market expectations.
• The iShares U.S. Treasury Bond ETF is close to ending the day where it began the month.

U.S. government debt sold off Thursday morning, nearly wiping out all of October’s gains as comments from Federal Reserve Chair Jerome Powell transformed investors’ expectations for interest-rate cuts.

The yield on the 10-year note, a benchmark for the Treasury market, traded as high as 4.112%, a big move higher from last week’s low of 3.934%. It was the highest intraday figure since Oct. 9.

Higher yields in the market make the existing bonds held by investors with lower rates less attractive. Yields and bond prices move in opposite directions.

A move above 4.15% for the 10-year yield would mean “a complete reversal of the bullish repricing that began on October 10th with the escalation of the trade war between Washington and Beijing,” wrote Ian Lyngen, head of U.S. rate strategy at BMO Capital Markets. Treasury prices have been rising since that time as investors flocked to haven assets.

The iShares U.S. Treasury Bond exchange-traded fund was down 0.3% this morning to trade as low as $23.16. If it settles at $23.12, it would close where it began the month.

The pace of the move is startling. Until late last week, the Treasury market was on track for its first positive October since 2019, meaning it was poised to end a five-year streak of declines. The iShares ETF was poised for a gain of 1% while the 10-year yield had settled below 4% for the first time since April.

Then Powell weighed in on the outlook for rates at a press conference on Wednesday. It followed the Fed’s announcement that it cut its target for the federal-funds rate by a quarter of a percentage point. “A further reduction in the policy rate at the December meeting is not a foregone conclusion,” he said. “Far from it.”

The strength of the market’s move suggests expectations of even lower interest rates were widespread. Just as the Fed describes itself as data-dependent, “the market is Fed dependent right now,” said Amar Reganti, fixed-income strategist at Hartford Funds, who worked at the Treasury during the Obama administration. “This is the market recalibrating to the cutting cycle.”

To be sure, there is a chance that the market is overreacting and that yields fall again. While Powell “did cast doubt on December, he did not exactly indicate that further rate relief beyond that is off the table,” said David Rosenberg, founder of Rosenberg Research. “He actually went out of his way to stress that point, but somehow it was missed in the Treasury market reaction.”

Write to Karishma Vanjani at karishma.vanjani@dowjones.com.