30-Year Yield Hits 5% Amid Inflation Shock... Will the Fed's Path Waver?

30-Year Treasury Yield Tops 5% for First Time Since 2007

Wall Street Warns "Fed Rate Cuts May Become More Difficult"

Fears of inflation are resurfacing. As oil prices surge in the aftermath of the Iran war, concerns are growing that upward pressure on prices could persist for an extended period. This has led to a sharp rise in long-term U.S. Treasury yields and shaken market expectations for Federal Reserve (Fed) rate cuts.

According to Bloomberg on the 13th (local time), the U.S. Treasury held an auction for new 30-year bonds worth $25 billion, with the yield set at 5.046%. This is the first time since just before the global financial crisis in 2007 that the 30-year Treasury yield has exceeded 5%. However, the auction closed at a higher yield than the market rate just prior, and demand fell short of expectations.

Federal Reserve (Fed). Reuters Yonhap News

The reason investors are demanding higher yields lies in inflation concerns stemming from the rise in oil prices. As disruptions to Middle Eastern oil supplies have materialized following the Iran war, international oil prices have soared, increasing the likelihood that energy-driven price pressures will persist for a long time.

On Wall Street, there is a focus on the fact that recent inflation expectation indicators are rising rapidly. The Breakeven Inflation (BEI) rate has continued its upward trend and has climbed to its highest level since 2022–2023.

BEI refers to the difference in yields between U.S. Treasury bonds and Treasury Inflation-Protected Securities (TIPS). It is used as an indicator of how much market participants expect inflation to rise in the future.

According to Fed data, the five-year breakeven rate, which reflects inflation expectations over the next five years, recently rose to around 2.7%, as reported by the Wall Street Journal (WSJ).

The 10-year inflation expectation indicator has also climbed to around 2.5% this month, reaching its highest level since 2023. In other words, the market has begun to price in the possibility that inflation over the next several years will exceed the Fed’s target of 2%.

This is also putting pressure on the Fed’s monetary policy path. Until recently, the market had placed more weight on the possibility of a rate cut within this year, but as inflation expectations rise again, there are growing observations that the Fed may keep rates higher for longer or even consider further tightening.

Clark Bellin of Bellwether Wealth said, “Wednesday’s Producer Price Index (PPI) showed a noticeable increase as the impact of $100-per-barrel oil prices has reached producers. The Fed is facing an inflation problem.”

Steven Zeng, a rates strategist at Deutsche Bank, said, “If the 30-year yield reaches around 5%, demand from pension funds and other long-term investors may revive. However, if rising energy prices prevent inflation expectations from becoming anchored, the market may have to recalculate the Fed’s trajectory.”

However, some believe that the situation is not yet at a level that should worry the Fed. Jan Nevruzi, a strategist at TD Securities, said, “There is still limited evidence that higher energy prices are spreading broadly into other commodity prices. The rise in inflation expectations does not immediately imply a change in policy.”

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