US treasury yields hit 16-year high over fears interest rates will stay higher for longer

Yields on long-term US government debt hit their highest levels since 2007 on Thursday as investors grew more fearful that the Federal Reserve will keep interest rates higher for longer to fight inflation.

The technology-focused Nasdaq Composite was off 0.2 per cent, extending its losses following the release on Wednesday of the minutes from the Fed’s July meeting. The benchmark S&P 500 opened 0.1 per cent higher.

The yield on the 10-year US Treasury rose 0.04 percentage points to 4.3 per cent, its highest point in 16 years, after the central bank cited “significant upside risks to inflation which could require further tightening of monetary policy”.

The prospect of interest rates staying higher for longer also pushed the yields on 10-year UK gilts 0.08 percentage points higher to 4.73 per cent, their highest level since 2008. Yields on 10-year German Bunds, the regional benchmark in Europe, rose 0.05 percentage points to 2.69 per cent. Bond yields rise as prices fall.

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“It doesn’t matter whether you think the Fed will or will not carry through with the lean in the Fed minutes,” said Stephen Innes, managing partner at SPI Asset Management. “The fact is that 10-year yields are soaring, and in the modern-day playbook for stock market operators that is bad news on multiple levels.”

A string of economic data in recent months indicated that the US economy has remained robust even as the Fed has taken interest rates to a 22-year high over the past year.

Adding to the list, the Philadelphia Fed Manufacturing index jumped to 12 in August, from minus 13.5, and well above the minus 10 consensus, marking its first positive reading in a year. Readings above zero mean the majority of survey respondents reported an overall expansion in manufacturing activity.

Japan’s yen edged up 0.3 per cent against the dollar to trade at its lowest level since November, as the difference between yields on US and Japanese government debt increased.

The decline pushed the yen below the level where the Japanese ministry of finance stepped in to support the currency last year, and served to heighten speculation that it would intervene again. On Tuesday, finance minister Shunichi Suzuki said he was watching the market moves “with a sense of urgency”.

Traders placed the probability of the central bank holding its federal funds rate steady at its next meeting in September at 87 per cent, according to data compiled by Refinitiv.

However, there was less certainty about how long it will take for interest rates to come down from historic highs. – Copyright The Financial Times Limited 2023