Ahead of FOMC, US 10-Year Treasury Yield Surpasses 3.5% for the First Time in 11 Years

[Asia Economy New York=Special Correspondent Joselgina] Ahead of the Federal Reserve's (Fed) interest rate decision, the yield on the US 10-year Treasury bond surpassed the psychological resistance level of 3.5% on the 19th (local time). The inversion phenomenon between short- and long-term Treasury yields, considered a precursor to an economic recession, also intensified.

On that day in the New York bond market, the 10-year yield surged to 3.518% at one point during trading. It then retraced slightly and is currently hovering around 3.481%. The 2-year yield, which is sensitive to monetary policy, also rose to 3.942%, marking the highest level since 2007.

This sharp rise in Treasury yields is due to the near certainty of an additional rate hike at the September Federal Open Market Committee (FOMC) regular meeting scheduled for the 20th-21st. According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds (FF) futures market reflects an 82% probability of a 0.75 percentage point increase. The possibility of a 1 percentage point hike is also at 18%.

Earlier, the August Consumer Price Index (CPI) inflation rate was released at 8.3%, far exceeding initial market expectations, which has further strengthened the case for the Fed's aggressive tightening. The Fed will also release the dot plot outlining the future interest rate path at this FOMC meeting.

The inversion between short- and long-term Treasury yields is also deepening. The spread between the 2-year and 10-year yields has widened to 46 basis points (1bp=0.01 percentage points), the largest since 2000. Tom Essaye of The Sevens Report commented, "This indicates that the economy is slowing and is likely to contract significantly within a few quarters," adding, "It is a message we need to continue paying close attention to."

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