Treasury yields hit 16-year high ahead of Fed meeting

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US yields hit a 16-year high ahead of the conclusion of the Federal Reserve’s policy meeting on Wednesday, at which the central bank is expected to hold rates steady, but may indicate its willingness to keep monetary policy tighter for longer.

The benchmark 10-year Treasury yield reached a session high of 4.371 per cent, its highest level since early November 2007. The five-year Treasury yield also reached a 16-year high of 4.524 per cent, while the yield on the two-year note hit a two-month high of 5.114 per cent.

Treasury yields, which move inversely to price, track interest rate and inflation expectations. Tuesday’s jump indicated that traders expected Fed chair Jay Powell to signal the central bank’s willingness to keep interest rates higher for longer.

Though Fed officials have signalled they are concerned about the risks of over-tightening monetary policy, mixed data from the US, including a recent jump in headline inflation, has complicated the central bank’s job. In the Fed’s “dot plot” — its economic and policy projections for the coming year — to be released tomorrow, officials may indicate they expect to keep interest rates at high levels for longer.

“Markets are setting up for a hawkish Fed tomorrow,” said Benjamin Jeffery, a US rates strategist at BMO Capital Markets.

Markets are pricing in a 99 per cent chance that interest rates will remain unchanged on Wednesday, but traders have roughly 50-50 odds on the chances of rates then being lifted by the end of the year.

Reflecting the fight central bankers still have on their hands to tame price pressures, the deputy governor of the Bank of Canada on Tuesday said the central bank was prepared to end its recent so-called pause on monetary policy tightening and “raise the policy interest rate further if needed”.

The UK, Switzerland and Japan are among the other countries whose central banks will announce policy decisions this week.

“Inflation has proved to be sneaky and central bankers find themselves in a less-than-straightforward position,” said Danni Hewson, head of financial analysis at AJ Bell.

“Move too far and they risk tanking their respective economies. Don’t move far enough and they risk cracking open the door and allowing prices to slide up.”

The latest US consumer price index data bolstered concerns that the Fed’s latest efforts to bring inflation back to its 2 per cent target might take longer than expected. Rising energy costs pushed the rise in the headline CPI figure to 3.7 per cent in August, above economists’ forecasts.

A measure of the dollar’s strength against six other currencies slid 0.1 per cent.

Elsewhere, Wall Street’s S&P 500 closed 0.2 per cent lower, with energy and industrials ranking as the benchmark’s worst-performing sectors. The tech-heavy Nasdaq Composite also fell 0.2 per cent.

Oil prices hit session highs before New York’s opening bell on Tuesday and began to retreat, with US oil and gas stocks subsequently tracking the downward movement, as the regular Wall Street trading session continued.

Brent crude, the international benchmark, extended gains into a fourth successive trading session, rising above $95 for the first time since November. Those early gains dissipated later in the session, leaving the price 0.1 per cent lower at $94.34 a barrel.

West Texas Intermediate, the US equivalent, also touched a 10-month high before sliding to settle 0.3 per cent lower at $91.20.

Line chart of ($/barrel) showing oil prices have risen to fresh highs for the year

Recent price gains have been spurred by news earlier this month that two of the world’s top producers, Saudi Arabia and Russia, will extend supply cuts until the end of the year.

Investors remain concerned the uptick in oil prices could hamper central banks’ efforts to tame inflation in the US and Europe, adding to the banks’ case for keeping interest rates higher for longer, despite indications suggesting global economic growth was slowing.

“The latest spike in oil prices is massively unhelpful, especially as inflation was already above central banks’ 2 per cent targets,” said Dario Perkins, managing director of global macro at TS Lombard. “That said, it is important to keep these recent inflationary developments in context. We are not yet in danger of undoing 12 months of solid disinflationary progress — not even close.”

Elsewhere, the region-wide Stoxx Europe 600 index closed less than 0.1 per cent lower, with positive moves for real estate, financials and energy stocks cancelled out by declines for healthcare groups and industrials. London’s FTSE 100 rose 0.1 per cent, as did France’s CAC 40.

China’s benchmark CSI 300 index fell 0.2 per cent, while Japan’s Topix was up 0.1 per cent as markets reopened after a holiday.

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