US 10-Year Yield Holds Pullback from 19-Year High

The yield on the 10-year US Treasury note rose to above 5.01% on Wednesday, the highest in 19 years, after the Federal Reserve raised interest rates by 25bps. The move was largely expected by financial markets after recent data pointed to high inflation, low unemployment, and strong consumer spending. Projections by FOMC members pointed to one or two additional rate hikes by next year, consistent with upward revisions to forecasts on inflation and downward revisions to unemployment. Besides higher inflation due to soaring energy prices, the Chairman Warsh also acknowledged that Treasuries have been pressured by competing for capital allocation with soaring corporate debt supply. Still, longer-term maturities rose less than the shorter part of the curve as confidence that the Fed unanimously raised rates to fight inflation restored some credibility for the central bank, after Chairman Warsh had earlier downplayed the urgency of a higher funds rate to reign in price growth.

The yield on the 10-year US Treasury note eased to 4.95% on Wednesday from the 19-year high of 5.01% in the previous session after the Federal Reserve raised interest rates by 25bps, as expected. The move was largely expected by financial markets after recent data pointed to high inflation, low unemployment, and strong consumer spending. Longer-term Treasuries were supported by confidence that the Fed will raise interest rates should the data warrant restrictive financial conditions, restoring some credibility after Chairman Warsh had earlier downplayed raising rates to fight inflation. Projections by FOMC members pointed to one or two additional rate hikes by next year, consistent with upward revisions to forecasts on inflation and downward revisions to unemployment. Still, yields on the 10-year note are 80bps higher since the start of the year. The impact of soaring energy inflation magnified pressure from soaring corporate debt supply and widening budget deficits.

The yield on the US 10-year Treasury note edged down to 4.97% on Wednesday, taking a breather after surging for five consecutive sessions to breach 5.04% on Tuesday, its highest level since July 2007. Investors are now bracing for the Fed’s policy decision later in the day. The central bank is widely expected to raise borrowing costs by 25bps, which would mark its first rate hike since 2023. Markets are currently pricing in roughly a 93% probability of such a move, with another ihike expected in December. A dip in oil prices also offered some temporary relief from inflationary pressures. Treasury yields have been rising amid higher oil prices, which are likely to fuel inflation and prompt tighter monetary policy, as well as concerns over elevated US fiscal deficits. On Tuesday, Treasury Secretary Bessent attributed the rise in bond yields to “global issues” and told lawmakers during his congressional hearing that the need to address the government deficit was another factor weighing.