US 10-Year Treasury Yield Nears 5%... Dovish Calls for Fed Pause Gain Momentum (Summary)

The 10-year U.S. Treasury yield, which serves as a benchmark for global bond yields, surpassed 4.9% on the 18th (local time), approaching the 5% level for the first time since 2007. This is a result of still robust consumer spending amid expectations of prolonged high interest rates.

With the recent sharp rise in Treasury yields tightening financial market conditions further, analyses from both inside and outside the Federal Reserve (Fed) suggest that the need for additional rate hikes within the year has diminished. Investors are now focused on the upcoming speech by Fed Chair Jerome Powell.

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10-year yield surpasses 4.9%... "Upward trend to continue"

In the New York bond market, the 10-year yield reached 4.904% around 3 p.m. that day. This is the first time the 10-year yield has exceeded 4.9% since July 2007, just before the global financial crisis. On the same day, the 2-year yield, which is sensitive to monetary policy, hit 5.218%, the highest since July 2006. The 5-year and 30-year yields rose to approximately 4.93% and 4.98%, respectively. Jamie Cox, a partner at Harris Financial, told CNBC, "The market is trying to figure out where yields will peak."

With U.S. economic indicators outperforming expectations, the 10-year yield has risen for three consecutive trading days and increased on four out of the last five trading days. September retail sales in the U.S., released the previous day, rose 0.7% month-over-month, far exceeding the market forecast of 0.2%. Industrial production also increased compared to the previous month, suggesting that the impact of the United Auto Workers (UAW) strike was limited.

Concerns that the high inflation-high interest rate environment may become entrenched are also exerting upward pressure on Treasury yields. Since March last year, the Fed has raised the U.S. benchmark interest rate 11 times, bringing it to the highest level in 22 years at 5.25-5.5%. Additionally, recent supply and demand conditions in the Treasury market have contributed to the rise in yields. Due to an increase in Treasury issuance caused by the expansion of the federal government's fiscal deficit, recent Treasury auctions have seen weak demand. This is a result of concerns over fiscal policy and deteriorating U.S.-China relations, which have reduced demand from foreign investors, including China. BlackRock stated in an investor report the previous day that "the 10-year yield could surpass 5%" and predicted "greater short-term volatility in the bond market."

As the benchmark 10-year Treasury yield surges, mortgage rates in the U.S. are also soaring. According to daily data from Mortgage News Daily, the average 30-year mortgage rate in the U.S. surpassed 8% that day. This is the first time mortgage rates have reached the 8% range since 2000.

[Image source=Reuters Yonhap News]

"Let's hold rates steady and observe" - Dovish voices gain strength

With Treasury yields rising sharply, dovish voices (favoring monetary easing) are growing both inside and outside the Fed. Given the increasingly tight financial market conditions, cautious views advocating to observe the overall economic impact are spreading. The recent confirmed trend of slowing inflation and the increasing difficulties faced by companies in a high-interest-rate environment also support these dovish voices.

Patrick Harker, President of the Philadelphia Federal Reserve Bank and a voting member of this year's Federal Open Market Committee (FOMC), expressed support for holding the benchmark interest rate steady in an interview with the Wall Street Journal (WSJ) released that day. He said, "Now is the time to sit tight," expressing concern about companies that cannot survive in a high-rate environment and noting that more corporate loans are reaching maturity. He explained that, unlike the strong economic indicators that exceeded expectations recently, signs of slowdown are being observed on the ground.

Harker stated, "It takes time for the effects of previous tightening to be absorbed," adding, "There is no need to hold rates steady for a long time. We need to watch the economy for a few months and then decide." Christopher Waller, a Fed governor known as a hawk (favoring monetary tightening), also showed a cautious stance the same day, saying, "I want to wait and see whether the U.S. economy will hold up or weaken." Earlier, he had evaluated that the sharp rise in Treasury yields acts as a form of tightening, partially substituting for the Fed's role.

However, John Williams, President of the New York Fed and considered the third most influential Fed official, still expressed concerns about inflation, stating the need to maintain a restrictive monetary policy stance for some time. The Fed's Beige Book, released the same day, noted that "most regions have seen little change since September" and that "the short-term economic outlook is generally stable or shows modest growth." The Beige Book also assessed that "inflation is rising moderately" and "tight labor markets are easing nationwide."

All eyes on Powell's remarks: What will he say?

Ahead of the blackout period when public comments are prohibited, Chair Powell will deliver a speech at the New York Economic Club on the 19th. In this speech, Powell is expected to reaffirm the commitment to the 2% inflation target while emphasizing cautious decision-making. Krishna Guha, Chief Strategist at Evercore ISI, said, "Indicators are stronger than expected, but financial conditions have tightened due to the sharp rise in Treasury yields," and predicted, "There is no urgent need for policy action in November, and the Fed will maintain a message of cautious response."

Luke Tilley, Chief Economist at Wilmington Trust, forecasted that the Fed's message will shift to "how long high rates will be maintained." Jeffrey Roach, Chief Economist at LPL Financial, said, "They will not declare victory in the war against inflation," suggesting that Powell may make hawkish remarks.

The market largely expects a rate hold in November. According to the CME FedWatch Tool, the federal funds futures market on that afternoon priced in over a 99% probability that the Fed will hold rates steady in November, up significantly from 88% the previous day and 90% a week ago. The probability of a hold continuing at the final FOMC meeting in December stands at around 59%. Earlier, at the September FOMC, the Fed held rates steady at 5.25-5.5% as expected but signaled one more rate hike within the year.

Meanwhile, the New York stock market closed lower across the board due to the sharp rise in Treasury yields and the impact of third-quarter earnings reports. On the New York Stock Exchange (NYSE), the Dow Jones Industrial Average, composed of blue-chip stocks, closed down 0.98% from the previous session. The S&P 500, focused on large-cap stocks, and the tech-heavy Nasdaq closed down 1.34% and 1.62%, respectively.

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