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US Treasury Yields Hit 1.7% Even As Fed Won’t Hike Interest

The Capitalist

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10-year US Treasury yields jumped above 1.7% on Thursday, which is its highest level for over a year. The rates climbed up even as the Federal Reserve assured investors they have no plans to hike interest rates anytime soon. In addition, the Fed emphasized they will not slow down on their bond-buying program.

RELATED: Investor Ray Dalio Advises: Don’t Own Bonds or Cash

‘Belated Overreaction’

Yesterday, benchmark 10-year Treasury note yields ended up higher by 8 basis points to 1.719%. Meanwhile, the yield for 30-year Treasury bonds climbed 3 basis points to 2.472%. Treasury yields have an inverse relationship with bond prices, which means as they go up, prices go down. 

In fact, the 10-year US Treasury yields topped out at 1.755% during the day. This was the first time since 2020 that yields rose above 1.75%. Since then, it gradually tapered off and settled back down at 1.730%. Meanwhile, 30-year yields also traded above 2.5% for the first time since August 2019. 

Guy LeBas, the chief fixed-income strategist at Janney Montgomery Scott, described the move as a “belated overreaction” to the Fed’s projections. It’s also the market’s reaction to Fed Chairman Jerome Powell’s statements on Wednesday. “The realization in the fixed income market really is around a commitment that Fed policy is going to be easy for some time and allow for yields to rise. That’s not a new theme,” said LeBas.

Stronger Economic Growth Forecast

Upon conclusion of the Fed’s two-day policy meeting, the Federal Open Market Committee (FOMC) gave their updated take on the market. The central bank said they now see stronger economic growth than earlier anticipated. From the December 4.2% GDP increase they predicted in December, the FOMC now sees GDP to increase to 6.5% by December.

In addition, the Fed expects core inflation to hit 2.2% this 2021. However, they do expect that inflation remains around 2%. What’s more, the Fed disclosed won’t hike interest rates through 2023. Also, they will continue its bond-buying program, with a minimum of $120 billion worth of bonds a month.  

Japan Influence on Bond Yields

Meanwhile, other strategists see overseas developments as another factor for Thursday’s US Treasury yield increases. Investors expect the Bank of Japan to widen a band around its long-term rate target. Per Japan’s Nikkei news outlet, this can signal the country’s step toward tighter policy.

Kathy Jones, the chief fixed-income strategist for the Schwab Center for Financial Research, sees Japan as an influence. “I think Japan had a lot to do with it because if you pull up a tick chart … the jump from where we were, 1.66ish, to 1.73 or 4 happened in a really short period of time right as the Japan information was coming out. I think that was the catalyst, and I suspect it might have caught some people positioned the wrong way, and then, it is an uptrend in yields, so other traders are going to jump on the bandwagon when you get a breakout like that,” she said. 

Letting the Economy Run Hot for a While

The adjusted projections bring a sense of optimism for the country’s recovery efforts. They also indicate that the Fed will let the economy run red-hot for a while before reigning in the excesses. This caused concerns for bond investors. They fear this means the central bank will let inflation increase more than normal. In turn, higher inflation will erode the value of bonds.

Meanwhile, some analysts opened up concerns that rising bond yields and inflation expectations can cause a repeat of the “taper tantrum” of 2013. Treasury yields shot up as the market panicked when the Feds announced they will taper its quantitative easing program. Willem Sels, chief investment officer for private banking and wealth management at HSBC, said things work differently now. The Fed’s message of a gradual normalization of policy meant the opposite. It won’t send shock shockwaves to the market anymore, which will prevent selloffs of equities, gold, and risk assets.  In fact, the business continued as usual. Treasury held Auctions last Thursday for $40 billion of four-week bills, $40 billion of eight-week bills, and $13 billion of 9-year 10-month Treasury Inflation-Protected Securities.

Watch the Reuters video reporting that Wall Street drops as bond yields rise:

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