Yields on long-term U.S. Treasury bonds have reached their highest level since 2007
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Yields on long-term U.S. Treasury bonds rose sharply following the Federal Reserve’s (Fed) decision to keep interest rates unchanged, despite rising inflation.
The yield on 30-year U.S. Treasury bonds rose by 10.5 basis points to 5.201%. At its peak, it reached 5.244%. This is the highest level since July 2007, according to CNBC.
The yield on benchmark 10-year bonds rose by nearly 7 basis points to 4.671%.
At the same time, yields on short-term securities declined: the yield on 2-year Treasuries fell by 4 basis points to 4.236%.
In the case of bonds, the yield rises as the market price of the security falls.
What Happened
On July 29, the Federal Reserve kept its interest rate unchanged at 3.5–3.75%. In its statement, the central bank acknowledged that inflation remains above its 2% annual target and that uncertainty—partly driven by the war in the Middle East—remains elevated. Three of the 12 voting members at the Fed meeting—more than expected—did not support keeping the rate unchanged and voted to raise it. Fed Chair Kevin Warsh said at a press conference following the meeting that the central bank is not deviating from its 2% inflation target, but did not provide details on what might prompt the Fed to reconsider its policy.
After taking office as Fed Chair, Warsh promised to break the vicious cycle in which markets react to signals from the central bank. Thus, the Fed stopped publishing forward guidance on the future direction of monetary policy for the first time since 2003.
How did the market react?
Following Warsh’s press conference, traders in the futures market lowered their expectations for a rate hike at the next meeting in September. According to CME FedWatch, the probability of this is now estimated at 53%, down from 75% the day before, Barron’s reports. Nevertheless, traders expect there is an 80% probability that the Fed will have to raise rates by the end of the year.
According to Steve Sosnik, chief strategist at Interactive Brokers, the market has begun to doubt that Warsh’s hawkish statements on inflation are backed by concrete action. “The sharp steepening of the yield curve is a direct result of two factors: a shift in expectations for the first rate cut from September to December, and concerns that the Fed is less committed to curbing long-term inflation than previously thought,” Barron’s quotes him as saying.
Tom Essay, an analyst at Sevens Report Research, also pointed out that Warsh is losing the trust of traders in the bond market. In his view, the Fed chair gave long, flowery answers without offering any specifics.
"This isn't a game. People are trying not to lose money. We're trying to control interest rate movements, so this strikes me as a very radical change in communication," Essay said.
This article was AI-translated and verified by a human editor
