Bond traders expect higher yields after Fed signals
Bond traders are bracing for Treasury yields to keep pushing higher after the Federal Reserve signaled it’s likely to hold interest rates at lofty levels well into next year.
Fifty-eight percent of the 172 respondents in the Bloomberg Markets Live Pulse survey conducted after the Fed’s decision said that 2-year Treasury yields have yet to peak, while a plurality expect 10-year yields to climb over 4.5%. Two-year rates rose above 5.19% Thursday to a fresh 17-year high, while 30-year yields climbed to 4.48%, a level last seen in 2011.
While the central bank left its benchmark rate unchanged Wednesday, policymakers indicated they may tighten monetary policy once more this year and scaled back estimates for rate cuts in 2024.
“The hawkish tone means we should expect shorter term underperformance of bonds as the markets price out cuts in 2024/25, and weakness in risky assets as the market searches for the end to the policy cycle in the US,” said Kellie Wood, a fund manager at Schroders Plc in Sydney.
The Fed’s more aggressive outlook also spurred a selloff across other bond markets. New Zealand 10-year yields jumped to 5.17%, the highest since 2011, with the move enhanced by data showing the economy grew more than twice as much as economists expected in the second quarter. Similar-dated Australian yields touched 4.32%, near a nine-year high reached last month.
The updated forecasts underscore the central bank’s message that monetary policy is poised to remain tight as the surprisingly resilient economy leaves fighting inflation the predominant concern. As a result, traders keep pushing out the timing of when the Fed will shift gears, dashing hopes for the bond rally that would likely emerge once it starts cutting rates again.
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