US Treasury yield hits highest level since October after Fed minutes

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Yields on longer-term US Treasuries reached their highest levels since October and US stocks declined as investors assessed minutes from the Federal Reserve’s July meeting and the outlook for interest rates.

In the minutes of the meeting, at which policymakers lifted rates to their highest level in 22 years, Fed officials said it was “important” to “balance the risk of an inadvertent overtightening of policy against the cost of an insufficient tightening”.

But potentially fuelling investors’ concerns about interest rates staying higher for longer, the minutes also cited “significant upside risks to inflation, which could require further tightening of monetary policy”.

The yield on the 10-year note rose about 0.06 percentage points to 4.28 per cent on Wednesday. That was the highest level since October, when the yield hit its highest point since 2007.

The yield on the policy-sensitive two-year Treasury increased 0.02 percentage points to 4.98 per cent. Treasury prices fall as yields rise.

Declines for Wall Street stocks accelerated as borrowing costs rose. The S&P 500 closed 0.8 per cent lower and the tech-focused Nasdaq Composite dropped 1.2 per cent.

“There was this notion that the Fed was just going to stand pat and hold rates at their current level for longer, now perhaps there’s a possibility that they’ll be raising again,” said Jack Ablin, chief investment officer at Cresset Capital. “Oil prices are higher, and that’s going to push headline [inflation] higher. And oil really permeates everything . . . high energy prices could push [core] inflation higher too.”

The probability traders placed on the Fed holding the federal funds rate at its current level at its next gathering in September remained at 89 per cent after the minutes of the July meeting had been digested.

While the majority of market participants believe that the Fed’s historic tightening campaign is drawing to a close, there is less consensus on how long it will take before interest rates start to go down.

Brent crude, the international oil benchmark, closed 1.7 per cent lower at $83.45, but has risen more than 10 per cent since the end of June.

In Europe, the region-wide Stoxx Europe 600 ended the day 0.1 per cent lower, while London’s FTSE 100 gave up 0.4 per cent and France’s Cac 40 shed 0.1 per cent.

Investors in US and Europe generally remain concerned that sticky inflation could prompt central banks on both sides of the Atlantic to keep interest rates higher for longer.

Meanwhile, markets in Asia were overshadowed by more gloomy data from China, which signalled that new home prices declined 2.5 per cent month on month in July, following a 2.2 per cent fall in the previous month.

Hong Kong’s Hang Seng index slipped 1.4 per cent, nearing its lowest level since the start of the year, while China’s benchmark CSI 300 dropped 0.7 per cent.

China’s once-dominant property sector has battled with flagging demand as the economy struggled to rebound after three years of severe pandemic restrictions, driving large property developers into a debt crisis.

Declines in the property sector come at a time of heightened anxiety over China’s economic recovery after a number of data releases in preceding weeks signalled the country was slipping into deflation, while its consumer and business activity fizzled.

In an unexpected policy move a day earlier, the People’s Bank of China lowered its one-year, medium-term lending facility rate, which affects loans to financial institutions, in an effort to shore up growth.

Elsewhere in Asia, South Korea’s Kospi shed 1.5 per cent and Japan’s Topix lost 1.3 per cent.

In the UK, sterling edged 0.3 per cent higher against the dollar, trading at $1.2735, after data showed that the annual rate of UK inflation fell to 6.8 per cent in July, down from 7.9 per cent in June, while the core figure remained unchanged.

Yet analysts struggled to assess whether the data was enough to convince the Bank of England to ease its aggressive monetary tightening campaign anytime soon.

“We see today’s data as doing little to shift the needle for policymakers and continue to look for a final 25 basis point hike from the BoE in September,” said Nick Rees, FX market analyst at Monex Europe.