"Rising Bond Yields Tighten Financial Conditions"
International Oil Price-Driven Inflation Concerns Remain a Variable
The yield on the 10-year U.S. Treasury note fell the most sharply since March this year. This followed a series of remarks from Federal Reserve (Fed) officials suggesting a pause in interest rate hikes amid soaring Treasury yields. The war between Israel and the Palestinian militant group Hamas also contributed to increased demand for safe-haven assets. However, if international oil prices continue to surge, there remains a possibility that the Fed could intensify its tightening measures.
The yield on the 10-year U.S. Treasury note fell 18 basis points (1bp = 0.01 percentage points) to 4.62% on the 9th (local time) compared to the previous trading day. This marked the largest daily drop since March 22 of this year. The 2-year Treasury yield also declined by 16 basis points to 4.92%.
However, as of 3:02 a.m. on the 10th, the 10-year Treasury yield was trading slightly higher at 4.657% compared to the previous day.
Recently, as the 10-year Treasury yield surged close to 5%, Fed officials made dovish (favoring monetary easing) remarks, which is interpreted as the reason for the slight decline in bond yields compared to last week.
Philip Jefferson, Vice Chair of the Fed, said in a speech at the National Association for Business Economics (NABE) meeting held in Dallas, "The Federal Open Market Committee (FOMC) is carefully evaluating the scope for further monetary policy," adding, "We recognize the tightening of financial conditions caused by rising bond yields and will keep this in mind when assessing the future path of monetary policy." This was interpreted as a sign that the Fed should be cautious about further rate hikes. Lori Logan, President of the Federal Reserve Bank of Dallas, also said at the same meeting, "An increase in term premiums could cool the economy," and "The need for additional tightening monetary policy is reduced."
Market expectations are emerging that the Fed will hold rates steady at the November FOMC meeting. Andrew Ticehurst, a rate strategist at Nomura Holdings Japan, said, "Fed officials seem to align with the market view that rising bond yields and tightening financial conditions will impact the benchmark interest rate," and "From a market pricing perspective, it is expected that the Fed will not raise rates further this year."
Bloomberg Economics, the economic research arm of Bloomberg News, expects the Fed to maintain the current upper bound of 5.5% until the end of the year and to lower rates by 0.75 percentage points to 4.75% by the end of next year.
The variable is international oil prices. The war between Israel and Hamas has caused oil prices to soar, raising concerns that inflation, which had just begun to ease, could be reignited.
On the day, West Texas Intermediate (WTI) crude oil closed at $86.38 per barrel, up 4.34% from the previous trading day. Although neither Israel nor Hamas are oil producers, oil prices surged amid suspicions that Iran, a major oil-producing country, is backing Hamas. Concerns also arose that Israel might directly attack Iran or that the U.S. could tighten sanctions on Iranian oil exports.
Javier Blas, an energy and commodities columnist at Bloomberg News, said, "Even if Israel does not respond immediately to Iran, if the U.S. imposes stricter sanctions, it is highly likely to affect Iran's oil production," and predicted, "Oil prices could rise to $100 per barrel, potentially even higher."
Robert Thompson, macroeconomic and rates strategist at the Royal Bank of Canada (RBC), said, "The recent rise in Treasury yields may provide a temporary reason for the Fed to pause rate hikes in the short term," but added, "However, it is still too early to justify ending the tightening cycle based on this reason."
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