10-year yields at 16-year high on Fed’s extended tightening outlook
10-year yields at 16-year high on Fed's extended tightening outlook
Surprise from the Federal Reserve: Interest Rate Hike Expectations and Reduced Cuts
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In a surprising move, the benchmark 10-year U.S. Treasury yields rose to 16-year highs on Thursday, following the Federal Reserve’s unexpected announcement of a potential rate hike and reduced rate cuts for next year. This decision caught markets off guard, as the prevailing belief was that encouraging inflation data over the past few months would have a calming effect on the Fed. However, the central bank maintains a hawkish stance for various reasons, necessitating its readiness to continue being restrictive.
Federal Reserve Chairman Jerome Powell, while describing the economy as “solid” with “strong” job growth, emphasized the importance of exerting additional pressure on financial conditions through 2025. Powell believes that this pressure would have a minimal impact on the economy and labor market compared to previous battles against inflation in the United States. However, the ultimate decision on the Fed’s hawkish outlook will depend on future economic data.
Currently, Fed funds futures traders are predicting only a partial chance of an additional rate hike. The CME Group’s FedWatch Tool indicates a 32% probability in November and a 45% chance by December. These expectations suggest that investors are not overly confident in the Fed’s intentions and are taking a cautious approach.
The benchmark 10-year note yields reached 4.490%, not seen since November 2007, while the two-year yields rose to 5.202%, the highest since July 2006. The narrowing inversion between the yield curve of two-year and 10-year notes now stands at minus 69 basis points, further highlighting the uncertainty in the market.
In a semi-related development, data released on Thursday revealed an unexpected drop in new claims for unemployment benefits in the United States. However, there is a possibility of an increase in the coming weeks due to a partial strike by the United Auto Workers (UAW) union, resulting in temporary layoffs of workers in the automobile industry due to material shortages.
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In other news, the U.S. Treasury Department is set to sell $15 billion worth of 10-year Treasury Inflation-Protected Securities (TIPS) on Thursday. This move is expected to provide investors with an opportunity to protect against inflation while also supporting the government’s financing needs.
Overall, the surprise from the Federal Reserve regarding the potential rate hike and reduced rate cuts has caused a stir in the market. Investors are now closely monitoring economic data to gauge the likelihood of the Fed following through with its hawkish outlook. The expectation of an additional rate hike remains uncertain, and the impact of the UAW strike on the job market adds another layer of complexity to the equation. As the situation unfolds, market participants await clarification from the Fed and its response to economic indicators.
