As the U.S. Federal Reserve (Fed) signaled additional rate hikes within the year in a so-called 'hawkish pause,' Treasury yields surged on the 21st (local time), the day after the monetary policy decision. The benchmark 10-year U.S. Treasury yield hit its highest level since 2007.
In the New York bond market, as of 3 p.m. that day, the 10-year yield rose 13 basis points (1bp = 0.01 percentage points) to 4.48% compared to the previous session. This is the highest level since September 2007, before the global financial crisis. The 2-year yield, which is sensitive to monetary policy, also hovered around 5.14%, briefly exceeding 5.2% during the session. The 30-year yield climbed to about 4.55%, marking its highest point since 2011.
This rise in Treasury yields is analyzed as a consequence of the Fed's decision the previous day to hold the benchmark interest rate steady at 5.25?5.50% while signaling further hikes. The recent resurgence of oil-driven inflation concerns and the indication of prolonged high rates in the Fed's dot plot also contributed upward pressure. In the new dot plot, the median rate forecast for the end of 2024 was revised up from 4.6% to 5.1%, and for the end of 2025 from 3.4% to 3.9%. This suggests that even if rate cuts begin next year, levels in the 5% range will persist.
Additionally, the weekly initial jobless claims released that day acted as a catalyst for the rise in Treasury yields. According to the U.S. Department of Labor, claims for the week of September 10?16 fell by 20,000 from the previous week to 201,000. This is the lowest level in eight months and below Wall Street experts' forecast of 225,000. Despite the Fed's tightening since last year, the labor market remains robust. Ian Lyngen, a rate strategist at BMO Capital Markets, commented, "(The initial jobless claims) slightly increase the possibility of a rate hike in November and firmly reinforce the Fed's message that rates will not be cut for a long time in 2024."
James Bullard, former president of the Federal Reserve Bank of St. Louis and known as a prominent hawk (favoring monetary tightening), emphasized in an interview with Bloomberg TV that additional rate hikes are necessary to prevent the risk of accelerating inflation. Bullard, who recently moved to become dean of the Purdue University Krannert School of Management, was classified as a hardline hawk during his tenure at the Fed. He also agreed that the Fed's indication of prolonged high rates was "reasonable."
The Wall Street Journal (WSJ) reported an analysis suggesting that high rates could effectively become permanent. The outlet attributed the recent surge in long-term Treasury yields and stock market weakness to a rise in the neutral rate, diagnosing that "if current rates do not slow demand or inflation, the neutral rate must be higher, and monetary policy is not restrictive."
However, the market still largely expects a pause in November. According to the Chicago Mercantile Exchange (CME) FedWatch tool, as of that afternoon, federal funds futures priced in more than a 68% chance that the Fed will hold rates steady in November.
The New York stock market closed lower across the board due to the rise in Treasury yields. The tech-heavy Nasdaq index fell 1.82% from the previous session. The Dow Jones Industrial Average and the S&P 500 declined by 1.08% and 1.64%, respectively. The Chicago Board Options Exchange (CBOE) Volatility Index (VIX), known as Wall Street's 'fear gauge,' surged more than 15%. Peter Cardillo, market economist at Spartan Capital Securities, said, "Today's decline is a continuation of yesterday's trend," adding, "Treasury yields are hitting their highest levels since 2006?2007, and the dollar is strengthening. All of this contributes to fear in the market."
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