The Insight: The U.S. 10-year bond yield rose as high as 5.1350% on Wednesday (23rd), finally closing at 5.114%, recording the largest single-day increase in over a year and reaching a new 19-year high. According to market interpretation, the sharp rise in the U.S. 10-year bond yield yesterday can be attributed to four main reasons:
1) Strong U.S. economic data: The September composite Purchasing Managers' Index (PMI) rose to 58.4, the highest since July 2021 and significantly above the 50-point boom-bust threshold. Strong economic performance implies that the Federal Reserve has relatively more room to maintain higher interest rates or further tighten policy.
2) Hawkish remarks by Federal Reserve Governor Michael Barr: He stated that the Fed still needs to raise interest rates further to bring down persistently high inflation. According to changes in interest rate futures prices, the market now estimates the probability of a rate hike at the Fed's October 29 meeting has risen to about 70%, significantly higher than the previous rate hike probability of around 55%.
3) Rising oil prices reignite inflation concerns: Brent crude futures once again broke above $100. Iranian President Masoud Pezeshkian gave a tough response to U.S. President Trump's threats at the United Nations General Assembly. His remarks dashed market hopes that Trump allowing the Iranian president to speak at the UN headquarters might help resolve bilateral differences. Naturally, rising oil prices deepen market concerns about inflation.
4) Poor performance in U.S. Treasury bond auctions reflects stress in the bond market: The U.S. Treasury auctioned $7 billion in 5-year bonds last night (23rd), but the results were clearly unsatisfactory. The yield on the issued bonds reached 5.033%, the highest level since 2006 (approximately the past 20 years); the previous auction of similar bonds had a yield of only 4.393%. In other words, not only long-end bonds such as 10-year or longer-term U.S. Treasuries lack sufficient market support, but now mid-term bonds such as 5-year ones are experiencing the same situation. As the U.S. debt problem becomes increasingly severe, the market clearly demands higher returns when purchasing U.S. Treasuries.
*Raising interest rates alone won't curb inflation; focus on high mortgage rates and the U.S. housing market*
U.S. inflation has failed to fall back to the Federal Reserve's 2% target level for five years. This is mainly influenced by multiple factors, including global supply chain restructuring and instability in the Middle East and the Russia-Ukraine situation, which have kept oil prices high, thereby pushing up overall inflation. When inflation is caused by overheating demand, raising interest rates can curb inflation; however, current U.S. inflation is more significantly driven by supply-side shortages, so relying solely on rate hikes to suppress inflation is actually ineffective. Nevertheless, to demonstrate its independence in the political environment and to show it is not influenced by external factors (such as Trump-related issues), the Federal Reserve has chosen to continuously raise interest rates as a policy stance; the market expects this will cause U.S. bond yields across different maturities to continue rising. The market is currently watching whether the U.S. 10-year bond yield will further challenge and test the high of 5.333% recorded in June 2007. Meanwhile, according to data from the Mortgage Bankers Association (MBA), the average U.S. 30-year fixed mortgage rate last week climbed to a two-year high of 7.12%. Therefore, the market is now closely observing whether elevated mortgage rates will drag down the performance of the U.S. housing market. {HSBC Chief Market Strategist, Alan Wan}
*Articles published in {Economic Times} with or without bylines reflect the authors' personal opinions and do not represent the stance of {Economic Times}. {Economic Times} serves as a platform providing a free forum for expression.
1) Strong U.S. economic data: The September composite Purchasing Managers' Index (PMI) rose to 58.4, the highest since July 2021 and significantly above the 50-point boom-bust threshold. Strong economic performance implies that the Federal Reserve has relatively more room to maintain higher interest rates or further tighten policy.
2) Hawkish remarks by Federal Reserve Governor Michael Barr: He stated that the Fed still needs to raise interest rates further to bring down persistently high inflation. According to changes in interest rate futures prices, the market now estimates the probability of a rate hike at the Fed's October 29 meeting has risen to about 70%, significantly higher than the previous rate hike probability of around 55%.
3) Rising oil prices reignite inflation concerns: Brent crude futures once again broke above $100. Iranian President Masoud Pezeshkian gave a tough response to U.S. President Trump's threats at the United Nations General Assembly. His remarks dashed market hopes that Trump allowing the Iranian president to speak at the UN headquarters might help resolve bilateral differences. Naturally, rising oil prices deepen market concerns about inflation.
4) Poor performance in U.S. Treasury bond auctions reflects stress in the bond market: The U.S. Treasury auctioned $7 billion in 5-year bonds last night (23rd), but the results were clearly unsatisfactory. The yield on the issued bonds reached 5.033%, the highest level since 2006 (approximately the past 20 years); the previous auction of similar bonds had a yield of only 4.393%. In other words, not only long-end bonds such as 10-year or longer-term U.S. Treasuries lack sufficient market support, but now mid-term bonds such as 5-year ones are experiencing the same situation. As the U.S. debt problem becomes increasingly severe, the market clearly demands higher returns when purchasing U.S. Treasuries.
*Raising interest rates alone won't curb inflation; focus on high mortgage rates and the U.S. housing market*
U.S. inflation has failed to fall back to the Federal Reserve's 2% target level for five years. This is mainly influenced by multiple factors, including global supply chain restructuring and instability in the Middle East and the Russia-Ukraine situation, which have kept oil prices high, thereby pushing up overall inflation. When inflation is caused by overheating demand, raising interest rates can curb inflation; however, current U.S. inflation is more significantly driven by supply-side shortages, so relying solely on rate hikes to suppress inflation is actually ineffective. Nevertheless, to demonstrate its independence in the political environment and to show it is not influenced by external factors (such as Trump-related issues), the Federal Reserve has chosen to continuously raise interest rates as a policy stance; the market expects this will cause U.S. bond yields across different maturities to continue rising. The market is currently watching whether the U.S. 10-year bond yield will further challenge and test the high of 5.333% recorded in June 2007. Meanwhile, according to data from the Mortgage Bankers Association (MBA), the average U.S. 30-year fixed mortgage rate last week climbed to a two-year high of 7.12%. Therefore, the market is now closely observing whether elevated mortgage rates will drag down the performance of the U.S. housing market. {HSBC Chief Market Strategist, Alan Wan}
*Articles published in {Economic Times} with or without bylines reflect the authors' personal opinions and do not represent the stance of {Economic Times}. {Economic Times} serves as a platform providing a free forum for expression.
