US Treasury yields hit 24-year highs as 10-year tests 5.35%
- US 10-year yield jumps above 5.31%, extending its summer surge.
- US 30-year yield reaches 5.724% as investors demand higher premiums.
- December Fed hike odds hold near 85% despite October pause bets.
US Treasury yields soar on Wednesday, with the 10- and 30-year yields reaching 24-year highs, at 5.35% and 5.724%, respectively, suggesting that investors are demanding a higher premium on US debt amid inflation and fiscal policy concerns.
Fiscal strains and inflation fears drive a sharp repricing of US debt risk
The US 10-year Treasury yield rises by over 3 basis points to 5.31% at the time of writing, boosting the Greenback’s appeal, as reflected in the US Dollar Index (DXY), gaining over 0.47%.
The DXY, which measures the buck’s performance against six currencies, is up at 102.32, still shy of testing the year-to-date (YTD) high of 102.53. Also, in the currency market, the Dollar is the strongest, followed by the safe-haven status of the Yen and Swiss Franc, while the shared currency, the Euro, is the weakest and plunges amid France’s fiscal concerns.
Investors' eyes are on the release of the latest minutes of the Federal Reserve’s September meeting. Worth noting, a 10-year bond auction would be scrutinised as the US Treasury plans to sell $39 billion of 10-year notes.
Of note, the yield on the US 10-year T-note has risen by over 60 basis points since the end of July, when hostilities in the Middle East resumed, pushing WTI up around 20% at that time.
So far, money markets priced in that the Federal Reserve will keep interest rates on hold at the October meeting. The odds of a rate hike are slim at 18%, but the odds of a December meeting remain at 85%, according to Prime Terminal.
US 10-year Treasury note yield chart – Monthly
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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