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US 10-Year Treasury Yield Soars to Pre-2007 Highs Post Fed Minutes

The Benchmark 10-Year⁤ U.S. Treasury Yield ​Hits 16-Year High

The benchmark 10-year U.S. Treasury yield surged to ​its highest level in ‍16 years after the ⁤Federal Reserve suggested ⁣more rate hikes might be needed to fight “significant upside risks ⁣to ‌inflation” in the latest policy ‌minutes.

The 10-year yield picked up 3‌ basis points to finish the Aug. 16 trading session ⁢at ‍4.29 percent—the highest close since October 2007. The real yield (inflation-adjusted) is 1.9 percent, the highest⁤ since July 2009.

The overall Treasury market was up across ​the board. The 2-year ⁤yield added‍ 1.1 basis points to ⁢4.991⁤ percent, while the⁢ 30-year​ yield jumped 2.1 basis points to 4.381 percent.

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The Federal Reserve published the July Federal Open Market Committee (FOMC)⁣ policy meeting minutes. ⁣Rate-setting Committee members refrained‍ from declaring‌ victory in their inflation fight, warning of “significant upside⁣ risks to inflation” ⁢that​ might require additional monetary‌ tightening to achieve the central ⁤bank’s 2 percent objective.

But meeting participants were also cautious about‍ the risks of ‍going too far since monetary policy is already in restrictive territory.

“A number of participants judged that, with the stance of monetary policy in restrictive ​territory,⁤ risks to the achievement‍ of the Committee’s goals had become more two sided, ⁢and it was important that‍ the ‌Committee’s decisions balance the risk of an inadvertent overtightening of ‍policy against the cost of an insufficient tightening,” the meeting summary stated.

Since March 2022, the Fed has raised interest rates 11 times ​for a​ total‍ of about 500 basis points to a target range of​ 5 percent and 5.25 percent. The institution held the benchmark fed funds rate ‍steady in ⁤June‌ to assess the overall ‍economy and determine if ‌the tightening cycle ⁢has ⁤cooled economic‍ conditions, tackled inflation, and doused the red-hot labor market.

Heading into the September FOMC meeting,⁢ there will be ⁣another jobs report and more inflation ​figures.

Meanwhile, investors will​ have an eye on the ‍Kansas ⁢City Fed Bank’s annual symposium in Jackson Hole, Wyoming, between Aug. 24 and Aug. 26.

Treasury Yields and Interest ⁣Rates

Is elevated Treasury yields the new normal? As the bond market continues to touch⁣ fresh highs, this is the newest debate ⁤in the financial markets.

Former Treasury Secretary Larry Summers ‍believes higher long-term ‌rates “are with ‍us to stay,” ⁢and could trend even⁢ higher. The 10-year​ yield could ‍average ​4.75 percent in the⁢ coming decade⁣ after averaging about 2.9 percent over the last two decades.

Former ⁣Treasury⁤ Secretary and Harvard Professor Larry Summers makes remarks during a discussion on low-income developing countries at the ⁤annual IMF and World Bank Spring Meetings in Washington on April 13, ​2016. (Mike Theiler/AFP via Getty Images)

“I don’t ​particularly see the current level of longer-term rates as ‍any kind of peak,” Mr.⁣ Summers told Bloomberg ⁢TV on Aug. 16,​ adding ⁢that the U.S. economy is in a different era, alluding ‍to changes in⁢ the‌ labor market and​ international ‌trade.

If ⁢Mr. Summers’​ projections are accurate, it would have a spillover effect on the⁣ real economy, especially in the mortgage market.

Mortgage rates generally track the 10-year Treasury bond.‍ So, as the⁢ rates on⁢ this benchmark bond​ have been on ⁣an‍ upward trajectory⁤ since the ​middle of 2020, the 30-year fixed-rate average mortgage rate has followed.

“Higher mortgage rates are probably here to stay for​ a while, but a reduction in uncertainty could meaningfully bring down mortgage rates,”⁣ wrote the Brookings⁢ Institution’s⁤ Wendy Edelberg and‌ Noadia Steinmetz-Silber.

According to the ‍Mortgage Bankers Association ‌(MBA), the 30-year mortgage​ rate ​ rose to 7.16 percent ‍for the week ending⁢ Aug. 11.

Meanwhile, inflation persistence, ‌a potential reacceleration of core and wage inflation, and “a perfect storm ​of different factors” could send longer-dated Treasury yields higher, says Patrick Saner,‌ the head‌ of macro ‌strategy at the Swiss Re Institute.

Earlier ‌this month, the Treasury Department announced⁣ a higher-than-expected debt supply ​of $1.007 trillion in the third quarter. Fitch‍ Ratings downgraded the U.S. ⁣government’s ⁤credit quality. The Federal Reserve indicated tightening could ‍continue into 2024​ as inflation⁤ is not‌ anticipated ⁤to⁤ reach the 2 percent⁣ target until 2025. The⁣ Bank of ‌Japan also diminished its yield curve control,​ potentially resulting in less ⁣demand from Japanese⁢ investors.

“These factors imply elevated levels of US debt supply,⁣ and fuel questions about how easily the private sector will be able to absorb it all and whether ​the US faces credit-worthiness‍ issues,” wrote Mr. Saner in a research note. “We are more ‘sanguine’: the most important ⁤factor supporting longer-dated yields, in our view, is continued economic​ resilience and the to-date slow ‍progress on⁣ disinflation, suggesting interest rates will remain elevated.”

But growing optimism surrounding ⁣a potential soft landing ‌could ⁢mitigate fears⁤ of another rate ​increase this year and potentially⁢ reverse the ‍upward trajectory of ⁤Treasury yields, ⁤say RBC strategists.

The 10-year Treasury, which⁤ is typically sensitive to economic outlooks, found additional support this week on stronger-than-expected retail ​sales data. In July, retail sales​ climbed⁢ 0.7 percent, topping the consensus⁣ estimate of 0.4 percent. ‍This resulted in the Atlanta Fed Bank’s GDPNow model estimate for the third quarter soaring to 5.8 percent, up from 5 percent on ⁢Aug. ⁢15.

At the same time, the July minutes highlight that‍ Fed officials are still prioritizing price ⁤stability over everything else, so strong economic data amid above-trend inflation could fuel ⁤officials to continue‍ raising interest ⁢rates.

“Whether ​it holds in the near-term may be dictated by sentiment around the Fed minutes today,” bank strategists wrote in a note.

Although economists are penciling in rate cuts early next year due ⁢to a trifecta of challenges—tighter⁤ credit conditions, student loan repayments, and pandemic-era savings being exh

" Conservative News Daily does not always share or support the views and opinions expressed here; they are just those of the writer."

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