[Summary] US Treasury Yields Surge on Fed Officials' Remarks... Highest Since 2008

[Asia Economy New York=Special Correspondent Joselgina] The benchmark market interest rate, the US 10-year Treasury yield, soared to its highest level since the 2008 global financial crisis. This was a result of remarks by Federal Reserve (Fed) officials indicating that the year-end benchmark interest rate would significantly exceed 4%, reinforcing expectations of aggressive tightening. Strong employment data also added upward pressure.

On the 20th (local time) in the New York bond market, the US 10-year Treasury yield closed at 4.23%, up 9 basis points (1bp=0.01 percentage point) from the previous session. This is the first time since 2008 that the 10-year yield has surpassed 4.2%. The 10-year yield, which was around 1.6% at the beginning of the year, has continued to rise in line with the Fed’s rate hike cycle earlier this year. The 2-year yield, which is sensitive to monetary policy, also jumped to around 4.61%, marking its highest level since August 2007.

This is analyzed as a result of increased demand for safe assets like government bonds amid strengthened expectations of aggressive Fed tightening. In particular, hawkish remarks by Fed officials acted as a catalyst for pushing up Treasury yields. Patrick Harker, President of the Federal Reserve Bank of Philadelphia, said in a public speech in New Jersey that "We (the Fed) will continue to raise rates," and "The year-end benchmark rate will far exceed 4%." He also added that "It is disappointing that there has been no progress in curbing inflation," and that it will take considerable time to reach the 2% target.

Following these remarks, the 10-year yield immediately widened its gains in the bond market. Fed Governor Lisa Cook also supported tightening, stating that "restrictive monetary policy must be maintained." Additionally, the weekly initial jobless claims released the same day decreased by 12,000 from the previous week, reaffirming the robustness of the labor market, which further strengthened expectations for Fed tightening.

The Fed is widely expected to implement a ‘giant step’ (a 0.75 percentage point increase in the benchmark rate) at the Federal Open Market Committee (FOMC) regular meeting on November 1-2. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds (FF) futures market currently reflects over a 97% probability of a giant step in November.

The possibility of the year-end benchmark rate rising to 4.5-4.75% has been confirmed at 75%. This implies at least a 1.5 percentage point increase over the remaining two FOMC meetings this year. Edward Moya, Senior Market Analyst at OANDA, predicted, "Rates could be raised by 0.75 percentage points in both November and December." If so, it would mark an unprecedented five consecutive giant steps. The market expects the US benchmark rate to rise to as high as 5% in the first half of next year.

Meanwhile, the sharp rise in Treasury yields suppressed risk asset sentiment, leading to a broad decline in the New York stock market that day. The Nasdaq index has fallen more than 32% since the beginning of the year.