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U.S. Treasury yields hit a 16-year high ahead of Wednesday’s Federal Reserve policy meeting, where the central bank is expected to keep interest rates steady but may signal its willingness to keep monetary policy tight for longer.
The benchmark 10-year Treasury yield hit a session high of 4.371%, its highest level since early November 2007. The five-year Treasury bond yield also hit a 16-year high of 4.524%, while the two-year Treasury bond yield also hit a 16-year high. The note hit a two-month high of 5.114%.
Treasury yields move inversely with prices, tracking interest rates and inflation expectations. Tuesday’s gains suggested traders expected Federal Reserve Chairman Jay Powell to signal the central bank’s willingness to keep interest rates higher for longer.
While Fed officials have expressed concerns about the risk of too tight monetary policy, mixed data from the U.S., including a recent sharp rise in headline inflation, has complicated the Fed’s work. In the Fed’s “dot plot” – its economic and policy forecasts for the coming year – due to be released tomorrow, officials are likely to say they expect to keep interest rates high for longer.
“Markets are bracing for a hawkish Fed tomorrow,” said Benjamin Jeffery, U.S. rates strategist at BMO Capital Markets.
Markets see a 99% chance of rates remaining unchanged on Wednesday, but traders see a roughly 50-50 chance of a rate hike before the end of the year.
The Bank of Canada’s deputy governor said on Tuesday the central bank was ready to end what it called a recent pause in monetary policy tightening and “raise policy rates,” reflecting that central bank officials are still grappling with price pressures. You can go further if you need to”.
Central banks in countries including Britain, Switzerland and Japan are due to announce policy decisions this week.
Danni Hewson, head of financial analysis at AJ Bell, said: “Inflation is proving elusive and central bankers find themselves in a less than straightforward position.”
“Go too far and they risk sinking their respective economies. If they don’t go far enough, they risk opening the door for prices to slide.”
The latest U.S. consumer price index data added to concerns that the Federal Reserve’s latest effort to bring inflation back to its 2% target may take longer than expected. Rising energy costs pushed the overall consumer price index (CPI) up to 3.7% in August, above economists’ forecasts.
A gauge of the dollar’s strength against six other currencies fell 0.1%.
Elsewhere, Wall Street’s S&P 500 closed down 0.2%, with energy and industrials among the worst-performing sectors in the benchmark index. The tech-heavy Nasdaq Composite also fell 0.2%.
Oil prices hit an intraday high before trading opened in New York on Tuesday before easing back, with U.S. oil and gas stocks following a lower trend as regular trading continued on Wall Street.
International benchmark Brent crude extended gains for a fourth straight session, rising above $95 for the first time since November. Those early gains dissipated later in the session, sending prices down 0.1% to $94.34 a barrel.
U.S. West Texas Intermediate crude also hit a 10-month high before falling 0.3% to end at $91.20.
News earlier this month that Saudi Arabia and Russia, the world’s two largest producers, would extend production cuts until the end of the year has spurred recent price increases.
Despite signs that global economic growth is slowing, investors remain concerned that higher oil prices could hamper efforts by U.S. and European central banks to curb inflation, giving banks more reason to keep interest rates higher for longer.
“The recent surge in oil prices is not helpful, especially with inflation already above the central bank’s 2% target,” said Dario Perkins, managing director of global macro at TS Lombard. “Having said that, it’s important to The key is to understand recent inflation developments. We are not in danger of erasing 12 months of solid deflationary progress – not even close.”
Elsewhere, Europe’s Stoxx 600 closed less than 0.1% lower, as gains in real estate, financial and energy stocks were offset by losses in health care groups and industrial stocks. London’s FTSE 100 rose 0.1%, while France’s CAC 40 also rose.
China’s benchmark CSI 300 index fell 0.2%, while Japan’s Topix rose 0.1% as markets reopened after the holidays.
