US 10-Year Treasury Yield Surpasses 5% for First Time in 16 Years... Powell's 'Hawkish Pause' Remarks Impact (Summary)

Powell "Inflation Still High"
'Hawkish Pause' Remarks Spur Rate Concerns
New York's 3 Major Stock Markets Fall Together
Wall Street Mostly Expects November Pause
Some Say "No Pivot in Early 2024"

The yield on the U.S. 10-year Treasury note, a global benchmark for bond yields, surpassed 5% for the first time in 16 years. This was triggered by Federal Reserve (Fed) Chair Jerome Powell’s ‘hawkish (preference for monetary tightening) pause’ message, suggesting the possibility of further rate hikes. The recent sharp rise in yields, reflecting tightening effects, activated caution in markets that had previously discounted additional tightening. With still robust employment and consumer spending, and the potential for inflation to reignite due to the Israel-Hamas (Palestine) conflict emerging as a variable, some analysts now predict that a pivot (rate cuts or policy shift) may not occur until the second half of next year.

U.S. 10-Year Treasury Yield Breaks 5% Following Powell’s Remarks

According to financial data provider LSEG iBoxx and major foreign media on the 19th (local time), the yield on the U.S. 10-year Treasury note in the New York bond market reached 5.001% around 5 p.m. that day. The 10-year Treasury yield rising above 5% is the first time since July 2007, just before the global financial crisis, marking a 16-year milestone. Since the end of August, yields have surged sharply due to strong economic indicators and the Fed’s forecast of prolonged high interest rates, breaking through the psychological barrier of 5%. On the same day, the yield on the U.S. 2-year Treasury note, which is sensitive to monetary policy, fell slightly to around 5.16% compared to the previous trading day but still remained at its highest level since 2006. Following the sharp rise in yields, the New York stock market declined across the board. The Dow Jones Industrial Average, focused on blue-chip stocks, dropped 0.75% from the previous close. The S&P 500, centered on large-cap stocks, and the Nasdaq, focused on tech stocks, fell by 0.85% and 0.96%, respectively.

Chair Powell’s indication of the possibility of further hikes, citing persistently high inflation and strong economic data, pushed Treasury prices down. In his speech at the New York Economic Club that day, Powell said, "Inflation remains high," and added, "If below-trend growth and labor market easing are not confirmed, additional tightening may be necessary." He assessed that the economy has been absorbing the high 5% interest rates without major difficulties, stating, "I feel the current policy is too tight. But I think I have to say it is not." Regarding the recent rise in Treasury yields, he said, "The rise in Treasury yields has tightened financial conditions, and this change can affect the direction of monetary policy." However, he did not answer whether the recent sharp rise in yields could replace further rate hikes.

The expectation of a soft landing amid the sharp rise in yields appears to have prompted such remarks. Earlier, the Fed had signaled one more rate hike this year from the current 5.25-5.5% target range, but analyses inside and outside the Fed suggested that the need for additional tightening was disappearing due to the recent surge in Treasury yields. The market had been paying close attention to Powell’s remarks that day, as he was scheduled to speak before the blackout period ahead of the Federal Open Market Committee (FOMC) meeting scheduled for October 31 to November 1, during which public comments are restricted.

Recent economic data showed solid growth, as Powell indicated. The previously released U.S. retail sales for September increased by 0.7% month-over-month, significantly exceeding market expectations of 0.2%. This contradicted market forecasts that U.S. consumption would slow due to accumulated tightening, depletion of excess savings, and the start of student loan repayments. The weekly initial jobless claims released that day also hit their lowest level in nine months.

Besides Powell’s remarks, a decrease in demand for Treasuries also fueled the rise in yields. U.S. government-issued Treasuries have doubled to $26 trillion over eight years. Additionally, the war triggered by the surprise attack of the Palestinian militant group Hamas on Israel, leading to rising oil prices and concerns over inflation rebound, was cited as another reason for the increase in Treasury yields.

Wall Street Mostly Expects a Pause in November

[Image source=Yonhap News]

On Wall Street, there is widespread analysis that Chair Powell has left his ‘options’ open between hawkish and dovish (preference for monetary easing) stances. Along with hawkish remarks, he mentioned ‘uncertainty’ and ‘cautious progress,’ signaling a short-term pause while leaving open the possibility of rate hikes depending on economic data. David Russell of TradeStation said, "Powell is keeping his options open and waiting for either side to become clearer." Laura Rosner, partner at Macropolicy Prospectives, analyzed, "Powell expects the economy to cool in the fourth quarter, and the sharp rise in Treasury yields is playing a part. He sent a message of a pause in November."

Wall Street largely expects the FOMC meeting next month to hold rates steady. According to the CME FedWatch tool, as of that day, the federal funds futures market priced in a 99.9% probability that the Fed will pause rate hikes at the FOMC meeting scheduled for October 31 to November 1 (as of 8:45 p.m. Eastern Time). This is an increase of over 6 percentage points from 93.4% the previous day. Regardless of the outlook for prolonged high rates, the market sees almost no chance of an immediate rate hike. Chris Zaccarelli, Chief Investment Officer (CIO) at Independent Advisor Alliance, noted in the recently released Beige Book that economic slowdown was indicated and said, "Powell hinted at the possibility of tightening but did not change the prevailing view that rates will likely remain on hold for the rest of the year."

However, some analysts believe it will be difficult to cut rates until the first half of next year. Sam Stovall, Chief Investment Strategist at market research firm CFRA Research, said, "There is not much to suggest the Fed will change or clarify its tightening stance. Powell’s remarks today indicate there is still much work to be done," and predicted, "The Fed will not start cutting rates until at least the second half of next year." He added, "The upward pressure on Treasury yields is raising concerns not only about reduced consumer spending but also about mortgage rates (home loan rates) surging." He assessed that investors are worried that further rate hikes could trigger a recession. The U.S. 30-year mortgage rate surpassed 8% this week, reaching its highest level in 23 years since 2000.

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