The worst bond route in decades hit a new milestone Monday with the yield on the 10-year Treasury reaching 3% for the first time since late 2018.
The yield on the benchmark 10-year Treasury note, which rises when bond prices fall, crossed the 3% level ahead of this week’s Federal Reserve meeting, recently trading at 3.002%, according to
A reference for borrowing costs on everything from mortgages to student loans, the yield last closed above 3% in November 2018 and has jumped from 1.496% at the end of last year.
Prices for Treasurys, corporate bonds and municipal debt have slumped this year in response to the Fed’s moves to raise interest rates in an effort to rein in inflation. The Bloomberg US Aggregate bond index—largely US Treasurys, highly rated corporate bonds and mortgage-backed securities—returned minus 9.5% this year as of April 29.
“It’s been a pretty bruising couple of months,” said Nick Hayes, head of total return and fixed income asset allocation at AXA Investment Managers.
Yields on Treasurys largely reflect investors’ expectations for short-term interest rates over the life of a bond. Rising yields are often associated with a strengthening economy because faster growth and a tighter labor market can lead central banks to crack down on inflation.
In this case, the labor market is extremely tight and inflation is running at its fastest pace in decades, prompting the Federal Reserve to signal a rapid series of interest-rate increases and sparking a steep climb in yields that has sent shock waves through markets.
Investors are unlikely to get much relief until inflation concerns abate, a wild card when Covid-19 outbreaks in Asia are pressing global supply chains and the war in Ukraine is driving up commodity prices, said Zachary Griffiths, senior macro strategist at
“There’s a lot of uncertainty with respect to inflation, monetary policy, geopolitics,” Mr. Griffiths said. “Even as the Fed has signaled they are going to tighten significantly it hasn’t really seemed to bring down inflation expectations yet, not durably.”
Fed officials increased interest rates by a quarter-percentage-point in March. The Fed’s latest policy-meeting minutes suggest the central bank could raise rates by a half-percentage point on Wednesday and begin reducing its $9 trillion asset portfolio. That may have surprised some in the market who expected a less aggressive pace, Mr. Griffiths said.
Ten-year Treasury yields were well above 3% for most of the past half-century, exceeding 15% in the 1980s, according to Ryan ALM & Tradeweb ICE. But in the past decade they have ended the day above 3% only 64 times.
Interest-rate derivatives show that investors expect the Fed to increase its benchmark federal-funds rate from its current level between 0.25% and 0.5% to just above 3% next year.
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