Despite the big drop on Friday, the 10-year Treasury yield is higher than shortly before the September rate cut.

By Wolf Richter for WOLF STREET.

The 10-Year Treasury yield fell by 11 basis points on Friday, much of it after Trump threatened to impose “a massive increase” of tariffs on Chinese imports in retaliation for China’s new export controls of rare earths, which caused stocks to tank and bond prices to jump, and as bond prices jumped, bond yields dropped. A few hours later, Trump clarified helpfully that the US would impose an additional 100% tariffs on China, on top of the existing tariffs, starting November 1, which pushed down stocks and long-term yields further.

The 10-year Treasury yield ended the day at 4.04%, the lowest Since September 16. Just before the rate cut, on September 11, it had dropped briefly below 4.0% and closed that day at 4.01%. After Friday’s 11-basis-point drop, it is once again below the Effective Federal Funds Rate (EFFR), which the Fed targets with its monetary policy rates.

Following the Fed’s 25-basis point rate cut on September 17, the EFFR had dropped by 25 basis points, to 4.08%. But since then, it has inched up by 2 basis points to 4.10% (blue in the chart).

The 30-year Treasury yield fell 10 basis points on Friday to 4.62%, just a hair below where it had been a month ago, and back to where it had been in April.

Long-term bond yields react to fears about inflation in the future, which are heightened by any perception of a lax Fed. They also react to the expected supply of long-term Treasury debt coming on the market that investors have to absorb, and that supply is driven by government deficits, and they’re huge. But the Treasury Department has now begun to shift funding of the new deficits to short-term Treasury bills to take some pressure off long-term  yields.

The 6-month Treasury yield closed on Friday at 3.83% and has been in the narrow range between 3.81% and 3.83% for a month.

It reacts to expectations of the Fed’s policy rates over the next two+ months, and is a good indicator where the short end of the bond market thinks the Fed’s policy rates will be within this two-month-or-so window.

The FOMC rate decision on October 29 is squarely in its window. The December 10 rate decision is near the edge of its two-month window. So the 6-month Treasury yield is for now showing bond-market expectations of only one more 25-basis-point cut this year.

Deficit funding shifts to T-bills.

Bessent’s Treasury Department had laid out a strategy of increasing T-bill issuance in order to finance new deficits with T-bills rather than longer-term Treasury notes and bonds. The idea was to take upward pressure off the long-term yields so that they wouldn’t rise further, and to reduce interest expenses as the Fed would cut short-term rates.

T-bills, which have terms of 1 month to 1 year, mature in large amounts constantly and are refinanced with newly issued T-bills. So when short-term rates drop, interest expense from T-bills drops fairly rapidly.

Auction sizes of T-bills have increased further. They’ve been increasingly gigantic since the debt ceiling in order to replenish the government’s checking account, the Treasury General Account (TGA) back to the desired level of $800 billion, which it reached in mid-September, and in order to fund part of the new deficits.

Over the auction week through October 10, T-bill auction sizes were larger on average than in the same week in August. (Note: none of the auction figures here include the Fed’s SOMA purchases.)

For example, the 4-week T-bill auction on October 6, at a massive $110 billion, was $10 billion larger (+10%) than in the same week in August. The 6-week auction of $90 billion was $5 billion larger (+6%) than in the same week in August.

Type	Auction date	Billion $
Bills 6-week	Oct-7	90.0
Bills 13-week	Oct-6	84.0
Bills 17-week	Oct-6	69.0
Bills 26-week	Oct-6	75.0
Bills 4-week	Oct-6	110.0
Bills 8-week	Oct-9	95.0
Bills		523.0

Auction sizes of 10-year notes and 30-year bonds have declined a little, but were still huge. Compared to the same week in August, the 3-year auction size this week was unchanged, but the 10-year and 30-year auction sizes were each $3 billion smaller.

Notes & Bonds	Auction date	Billion $
Notes 3-year	Oct-7	58.0
Notes 10-year	Oct-10	39.0
Bonds 30-year	Oct-9	22.0
Notes & bonds		119.0

The share of T-bills outstanding, as of the end of September, has not yet reached the 2024 levels, according to the monthly data from the Treasury Department. That is due to the drop in the share of T-bills outstanding during the debt ceiling, when the size of the note and bond auctions were maintained, but T-bill auctions were reduced to keep the overall debt below the debt ceiling.

After the debt ceiling, starting in early July, larger T-bill auctions to replenish the TGA (government’s checking account) brought total T-bills outstanding back to $6.4 trillion by the end of September, where they had been at the end of 2024, just before the debt ceiling.

At the end of September, T-bills accounted for 21.5% of total marketable securities, roughly in the same range since December 2023, and below the 2024-high of 22.5%.

But with the increased T-bill auction sizes, and slightly smaller 10-year note and 30-year bond auctions, the share of T-bills should start creeping up beyond the 2024-highs, and the first signs of that should come with the data for the end of October:

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WOLF STREET FEATURE: Daily Market Insights by Chris Vermeulen, Chief Investment Officer, TheTechnicalTraders.com.