Treasury yields have climbed back toward the highs of the last decade as traders position for a possible Federal Reserve rate hike, days before Chair Kevin Warsh’s next policy decision. The 10-year yield has risen more than 30 basis points since the end of June, and the odds of a hike on Wednesday stand at roughly 38%, up from closer to 13% a week ago.
The U.S. bond market wants more from Federal Reserve Chair Kevin Warsh than tough talk on inflation. The outbreak of new Iran war hostilities in July jolted global crude-oil prices briefly above $100 a barrel and triggered another selloff in the $30 trillion Treasury market.
That sent the benchmark 10-year Treasury yield up more than 30 basis points (0.30 percentage point) since the end of June, when hopes were running high for a more lasting calm out of the Persian Gulf. As of Friday, the yield — the basis for mortgage rates and much of the consumer-lending economy — sat at 4.678%, near the highs of the last decade.
Hike odds climb to 38% before Wednesday
Traders sold U.S. government bonds over the past week on concerns that higher energy costs could lift inflation and trigger the Fed to take action on interest rates perhaps sooner than previously expected. On Friday, the CME FedWatch Tool put the odds of the Fed holding steady on Wednesday at 62%, with a roughly 38% chance of a hike — up from closer to 13% a week ago, when cooler inflation data for June soothed worries over rate increases.
Gennadiy Goldberg, head of U.S. rates strategy at TD Securities, said that repricing shows “how enormously worried the market is about inflation” — and how worried it is about the Fed matching Warsh’s talk of achieving 2% inflation. It’s no secret that some members of the Fed’s rate-setting committee favor interest-rate hikes to coax inflation back down.
Oil, deficits and AI debt press on yields
The Fed cannot control the flow of oil out of the Persian Gulf, nor lower gas and diesel prices that recently moved back above $4 a gallon and to $5.20 a gallon, respectively, according to GasBuddy. But it can lay out how, and when, it expects to get inflation back down to its 2% annual target — and Warsh has made clear he wants a more tight-lipped central bank that does not telegraph rate plans in advance.
Barclays analysts also expect the U.S. to face a roughly $2 trillion budget deficit in 2026 and see Treasury issuance playing a role in filling that gap. Big Tech “hyperscalers” are also issuing a deluge of debt to fund the artificial-intelligence buildout, with Moody’s Ratings expecting almost $1 trillion in capital expenditures by the group in 2027, following nearly $800 billion this year.
The 2-year yield sits above the Fed’s own ceiling
Meanwhile, the policy-sensitive 2-year Treasury yield crossed above the Fed’s 3.75% upper limit for its overnight target range, which stands at 3.5% to 3.75%. On Friday it was near early-2025 levels at 4.328%, signaling anxiety in markets about potential rate hikes.
Stocks booked another week of losses. The Dow Jones Industrial Average closed the week 0.4% lower, while the S&P 500 shed 0.6% and the Nasdaq Composite fell 2.1%, leaving the tech-heavy index 7.8% below its record close from early June, according to Dow Jones Market Data.
Higher interest rates tend to curb spending by businesses and consumers, which in turn slows the economy and hurts stock prices.
Source: MarketWatch
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