Concerns Over Inflation... US Treasury Yields Touch 4% (Comprehensive)

The yield on the U.S. 10-year Treasury note surpassed the 4% mark intraday for the first time since November last year. This surge was driven by concerns that the Federal Reserve's (Fed) rate hike cycle could last longer and be more aggressive than expected due to persistently stubborn inflation. The rise in Treasury yields also put pressure on the stock market.

On the 1st (local time) in the New York bond market, the benchmark long-term 10-year Treasury yield briefly jumped to 4.01% intraday before easing to around 3.99%. The 2-year yield, which is sensitive to monetary policy, also spiked to 4.904%, nearing the 5% mark.

This rise in Treasury yields is interpreted as a reaction to heightened inflation concerns that have surged sharply since last month. Key indicators such as employment, prices, and consumption all exceeded market expectations, intensifying fears of Fed tightening. These indicators are seen as further fueling inflation, providing grounds for the Fed to adopt another round of aggressive tightening steps.

The Wall Street Journal (WSJ) reported, "The 10-year yield hitting the 4% level is the first since November last year," adding that "Treasury prices were hit due to fears of inflation and sustained high interest rates." Treasury yields and prices move inversely. Tim Horan, Chief Investment Officer at Chilton Trust, said, "We are testing how high the 10-year yield can rise in this cycle."

[Image source=Reuters Yonhap News]

On the same day, hawkish remarks from Fed officials added fuel to tightening concerns. Raphael Bostic, President of the Federal Reserve Bank of Atlanta, stated in an online essay that "it is necessary to raise the federal funds rate to 5-5.25% and maintain it at that level through 2024," emphasizing that inflation can only be reduced through a tight monetary policy.

President Bostic dismissed early-year hopes for a pivot, saying, "History teaches us that if easing policies are implemented before inflation is fully subdued, inflation can explode again." He cited the "disastrous results of the 1970s," noting that "inflation was only controlled after interest rates reached 20%. We do not want a repeat of that situation, so we must fight inflation now."

Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, also left open the possibility of larger rate hikes at the March Federal Open Market Committee (FOMC) meeting, stating that the size of the increase could be "open." However, he confirmed that no decision has been made yet on whether the hike will be 0.25 or 0.5 percentage points. He added that the more important point will be the Fed's dot plot final rate and year-end rate outlook rather than the immediate hike size.

Market expectations for this year's terminal rate have also been revised upward. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds (FF) futures market currently prices in about a 40% chance that the terminal rate will rise to 5.5-5.75% this year. Considering the current U.S. rate range of 4.5-4.75%, this implies a possible additional 1 percentage point hike. This is significantly higher than the Fed's December dot plot median year-end rate forecast of 5.1%.

Bond experts expect the 10-year yield to continue its upward trend ahead of the March 22 FOMC meeting. Mike Schumacher, Managing Director at Wells Fargo, predicted, "The 10-year yield could easily reach 4.2% in the short term." Ben Santonelli, Portfolio Manager at Pollen Capital Credit, noted, "Employment and wage conditions are stronger and more persistent than people expected."

Although the U.S. manufacturing indicators released that day showed continued contraction, tightening concerns were further reinforced. The Institute for Supply Management (ISM) reported a February manufacturing PMI of 47.7, below the baseline of 50. S&P Global's February manufacturing PMI was 47.3, marking four consecutive months below 50. A reading below 50 indicates economic contraction.

Inflation concerns have been pushing Treasury yields higher day after day, putting pressure on the stock market. Major New York stock indices, which showed strong rallies at the beginning of the year, retreated throughout February as strong employment, consumption, and inflation data were confirmed. On the first trading day of March, both the Nasdaq and S&P 500 indices closed lower.

This content was produced with the assistance of AI translation services.