US 10-year yield rises to 3.5% for first time since 2011

US 10-year yield rises to 3.5% for first time since 2011

(Bloomberg) — The rate rose above 3.50% for the first time since 2011, with the bond market extending its downtrend ahead of another massive interest rate hike the Federal Reserve expects this week to bring down inflation.

The 10-year bond yield jumped 6.6 basis points to 3.516%, surpassing the psychological level set in mid-June. Selling pressures focus more on the policy-sensitive two-year note, with the benchmark index rising 7.5 basis points to 3.94%, posting a new high since October 2007.

Traders are betting that another three-quarter point rise in this week’s Federal Reserve report is largely a done deal. Talk of a 100bp move to curb price pressures showed few signs of abating even after the latest round of interest rate increases.

The money market was closed overnight as the UK celebrated a day of mourning for Queen Elizabeth II’s funeral.

Read: ‘Wrong’ Traders Face the Possibility of Fed Increase Even More

Investors are also raising expectations of how much higher the US central bank might eventually push interest rates as early as 2023, with March OIS contracts pointing to a peak level of 4.47%.

However, fears are growing that the economy may slip into recession and prompt policy makers to cut interest rates next year. This is evidenced by the fluctuations between short-term and long-term Treasuries yields that are the deepest since 2000. The two-year yield is 0.42 percentage points above 10-year Treasuries, and about 0.37 percentage points higher than 30-year notes.

The yield on five-year Treasury inflation-protected debt rose to the highest level since 2009 on Monday, underscoring the impact of the Federal Reserve’s rate increase on financial conditions. Five-year Treasury Inflation-Protected Securities topped their 2018 highs of 1.172%, to 1.22%. TIPS investors receive additional income to offset changes in consumer prices, making TIPS returns a measure of the true cost of money.

William O’Donnell, Citi strategist, wrote that a sustained move above 3.50% in 10 years could see “support near 3.76% – the highest level rejected in February 2011 and not revisited since then”.

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A number of central banks are meeting this week and they are expected to tighten policy. They include the Bank of England, the Swiss National Bank and the Swedish Riksbank. The Bank of Japan is also holding a policy meeting, although it is not expected to be clamped down on it.

© Bloomberg LP 2022

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