Due to Inflation Concerns... US Treasury Yields Finally Surpass 4%

Concerns are growing that the interest rate hike cycle may be prolonged, leading the U.S. 10-year Treasury yield to finally surpass 4% intraday.

On the morning of the 1st (local time) in the New York bond market, the long-term benchmark 10-year U.S. Treasury yield briefly surged to 4.006% before easing to around 3.98%. This is the first time since November last year that the 10-year yield has crossed the psychological resistance level of 4%. The 2-year yield, which is sensitive to monetary policy, also spiked to 4.904% intraday, approaching 5%.

This rise in Treasury yields is interpreted as a reaction to heightened inflation concerns that have surged since last month. Major indicators such as employment, prices, and consumption have all significantly exceeded market expectations, sharply increasing fears that the Federal Reserve's (Fed) tightening could be prolonged. These indicators are seen as further fueling inflation, providing grounds for the Fed to take another high-intensity tightening step.

The Wall Street Journal (WSJ) pointed out, "The current rate of 4.5-4.75% is close to the 5% level that was considered sufficiently high to control inflation as recently as December last year," adding, "However, recent economic data show that inflation has not yet eased." Tim Horan, Chief Investment Officer at Chilton Trust, conveyed the sentiment, saying, "The 10-year yield is testing how high it can climb."

[Image source=Reuters Yonhap News]

On the same day, hawkish remarks from Fed officials further intensified tightening concerns. Raphael Bostic, President of the Federal Reserve Bank of Atlanta, stated in an online essay that "it is necessary to raise the federal funds rate to 5-5.25% and maintain this level through 2024." He emphasized that only through a more restrictive monetary policy can inflation be reduced.

In particular, President Bostic dismissed early-year hopes for a pivot (policy shift), saying, "History teaches us that if easing policies are implemented before inflation is fully subdued, inflation can explode again." He cited the "disastrous results of the 1970s," noting, "Inflation was only controlled after interest rates reached 20%. We do not want such a scenario to repeat, so we must fight inflation now."

Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, also left open the possibility of a larger rate hike at the March Federal Open Market Committee (FOMC) meeting, stating that the size of the increase could be "open." However, he added that no decision has been made yet on whether it will be a 0.25 percentage point or 0.5 percentage point hike at this time.

According to the Chicago Mercantile Exchange (CME) FedWatch tool, the probability of a big step (a 0.5 percentage point increase) in March has risen to the 30% range in the federal funds (FF) futures market. The chance of a 0.25 percentage point hike at the March meeting is 69.4%, while the chance of a 0.50 percentage point hike is 30.6%. Although a 0.25 percentage point increase remains the consensus, this reflects growing market concerns about tightening. The minutes from the February FOMC meeting also confirmed that some members had expressed support for a 0.5 percentage point hike.

As inflation concerns push Treasury yields higher, the stock market is under pressure. The three major New York stock indices, which showed a strong rally at the beginning of the year, all retreated in February as strong employment, consumption, and price data were confirmed. On the first trading day of March, the market opened lower and has been fluctuating around the flat line. Market experts predict that if the 10-year yield surpasses the psychological resistance level of 4% and rises further, it will exert significant pressure on the stock market. According to Investors Intelligence, the proportion of respondents expecting a bull market in a recent weekly survey dropped from 44.4% to 38.4%.