10-year Treasury yield nears 5 percent ahead of Fed decision

Benchmark 10-year Treasury yields neared the key psychological level of 5 percent on Monday ahead of this week's Federal Reserve meeting, at which the US central bank is widely expected to raise interest rates.

US consumer prices accelerated in August, data on Friday showed, boosting bets that the Fed will hike rates to stem inflation that is already running well above its 2 percent annual target.

That was “probably the nail in the coffin,” said Tom di Galoma, managing director at Mischler Financial.

Surging oil prices have added to concerns that inflation will keep worsening as the war with Iran drags on. Oil prices jumped more than 3 percent on Monday, after new strikes on Saudi Arabian energy infrastructure and attacks on ships in the Middle East compounded supply concerns.

A strong jobs picture, with employers adding 162,000 jobs last month, also reinforced the view. 

Fed funds futures traders are now pricing in 89 percent odds of a hike at the conclusion of the Fed’s two-day meeting on Wednesday. 

Traders will also focus on updated interest rate projections in the Fed’s “dot plot,” which may show that some policymakers anticipate an additional rate hike this year. The last quarterly projections at the Fed’s June meeting showed nine Fed officials expected a rate hike by year-end. 

The 2-year note yield which typically moves in step with Fed interest rate expectations, rose 0.54 basis points to 4.649 percent. The yield on benchmark US 10-year notes rose 0.84 basis points to 4.983 percent.

Rising interest rate expectations, heavy corporate and government debt supply, a strong growth outlook and concerns about the long-term US fiscal trajectory have combined to send yields higher in the past month. 

“The budget and the deficit and the overall makeup of our debt continues to grow,” said di Galoma.

The 5 percent level for 10-year notes will be seen as a key test on whether economic and equity market strength are able to sustain the higher rates. The 10-year yields underpin mortgages and other loans and housing activity has remained subdued amid higher rates even as other sectors of the economy such as the tech sector grow. 

Demand for longer-dated debt will also be tested when the Treasury sells US$13 billion in 20-year bonds on Tuesday. The US government will also sell US$19 billion in 10-year Treasury Inflation-Protected Securities on Thursday. 

Reuters

𝗗𝗼𝘄𝗻𝗹𝗼𝗮𝗱 𝗧𝗵𝗲 𝗦𝘁𝗮𝗻𝗱𝗮𝗿𝗱 𝗔𝗽𝗽 ↓