US 10-year Treasury Yields hit fresh highs in over 19 years

United States (US) 10-year Treasury Yields have hit a fresh high of 5.03%, the level never seen in a little over 19 years. Higher yields on US bonds indicate rising interest obligations for the government, which generally leads to significant bond-buying operations by the administration. This scenario also diminishes the appeal of riskier assets.

Hot inflation expectations due to elevated oil prices, and fresh fears of a series of interest rate hikes by the Federal Reserve (Fed), are fuelling borrowing costs for the US government.

Oil prices have remained significantly higher in the past months since the onset of the Middle East war, which has de-anchored global inflation expectations. The WTI Oil trades close to $100 levels as concerns regarding prolonged energy supply disruption remain elevated.

Surging inflationary pressures worldwide have forced central banks to tighten their monetary conditions. This month, the European Central Bank (ECB) has already raised its policy rates by 25 basis points (bps).

The Federal Reserve (Fed) is also expected to break its five-meetings hold and hike interest rates by 25 bps to 3.75%-4.00% on Wednesday. Market experts have also started pricing in more rate hikes by the central bank.

Fed seen hiking as BNY flags limits to further tightening

Strategists at BNY expect the FOMC to “enact a 25bp rate hike this Wednesday, in line with implied market probabilities, which currently price over a 90% likelihood of such action.”

BNY adds that “while we expect a hike this week, and probably one more this year, we think the path to even higher policy rates is strewn with potential impediments to significantly tighter policy.” In their view, “the nearly 100bp of hikes (equivalent to four hikes of the standard 25bp increment) currently priced in will be realized,” but they caution that, although they are “not ready to see shorter-maturity yields fall any time soon,” these yields “may ultimately prove to be ahead of themselves.”