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The 10-year Treasury yield rose above 5 per cent on Monday for the first time in 16 years, extending a multi-week rout in bonds as investors bet that the US Federal Reserve would keep interest rates at their current high levels for longer.
The 10-year yield, which is the benchmark for asset prices across the globe, rose 0.09 percentage points to 5.01 per cent, its highest level since July 2007, extending a steady repricing of government debt that has been fuelled by better than expected economic data and the US government’s vast borrowing plans.
The rise in yields comes despite the outbreak of the Israel-Hamas conflict, which briefly triggered a flight to Treasuries this month but was quickly shrugged off as investors focused on the domestic factors pushing yields higher.
The risk of escalation in the Middle East would usually boost Treasuries, said Mohit Kumar, chief European economist at Jefferies. “But the US economy is doing well and with a big wall of [Treasury] issuance coming up everyone is worried about who is going to buy.”
Yields on longer-dated Treasury bonds have moved higher since the Fed indicated in the so-called dot plot from its September meeting that officials were expecting a slower path towards interest rate cuts in 2024 and 2025. Robust US economic data since then has only hardened investor expectations that the Fed is likely to keep rates higher for longer.
Stronger than expected US retail sales, labour market and inflation data in recent weeks have helped push yields higher, despite the historic rise in interest rates delivered by the Fed over the past 18 months.
In the futures market, traders were betting that interest rates would be at 4.7 per cent by the end of 2024, compared with expectations of a level of 4.2 per cent at the start of September.
The latest move in Treasury yields came after Fed chair Jay Powell on Thursday signalled that the US central bank was prepared to forgo raising interest rates when they next meet in November.
The Fed’s reluctance to raise borrowing costs further, despite a healthy economy, may force policymakers to hold them at a high level in order to bring inflation down, analysts said.
Growing concerns over the US government’s near $2tn annual budget deficit, exacerbated by Fitch Ratings’ decision in August to lower the US credit rating, have also added to upward pressure on yields.
Bond yields across Europe followed Treasuries higher. Ten-year German Bund yields, a benchmark for the eurozone, rose 0.08 percentage points to 2.96 per cent. Yields on 10-year UK gilts rose 0.07 percentage points to 4.73 per cent.
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