Bond yields are spiking, with Wall Street betting that the Federal Reserve will hold interest rates at a higher level for longer in a bid to crush inflation.
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Bond prices are tanking, and that’s worrying Wall Street.
10-year Treasury yields hit a 16-year high Wednesday and are hovering just below 5%.
These four charts capture the bond-market chaos of the past few weeks.
Bonds are cratering – and that’s spooking Wall Street.
Ten-year US Treasury yields hit a 16-year high Wednesday, having been driven up for weeks by the assumption that the Federal Reserve will hold interest rates at their current level well into 2024 in a bid to kill off inflation for good.
Over the past 18 months, the Fed has raised borrowing costs from near-zero to over 5%.
Its fastest tightening cycle since the 1980s has brought inflation down – but with the Consumer Price Index still outpacing its 2% target, investors are worried that the war against soaring prices might not be over just yet.
Around 1-in-3 traders think the central bank will hike again before the end of this year – and most think it won’t start slashing rates until June 2024 at the earliest, per the CME Group’s Fedwatch tool.
It’s that pessimism that’s fueled the bond-market sell-off. When borrowing costs rise, older debt with a lower coupon payment becomes less attractive to investors.
Yields, which move in the opposite direction to prices, climbed steadily for much of the past year and then have spiked from the end of July onwards.
Longer-duration yields have jumped around 80 basis points since then – and on Wednesday, the yield on 30-year US Treasury bonds topped 5% for the first time since the 2008 financial crisis.
Other assets have been affected by investors’ interest-rate worries, too.
Stocks have tumbled over the past two months, bringing a dramatic halt to the asset class’ first-half AI-fueled surge. Equities become less attractive to investors when their returns relative to fixed income fall.
The benchmark S&P 500 and tech-heavy Nasdaq Composite indices have both dropped around 7% since July 31, while the Dow Jones Industrial Average has shed 2,500 points over the same period to wipe out all its gains for 2023.
Meanwhile, the US Dollar enjoyed a stellar third quarter, with a gauge of the greenback’s strength versus six other currencies up nearly 4%.
Again, its movements have been driven by interest rate expectations – because when borrowing costs rise, the buck becomes more attractive to foreign investors seeking juicier yields.
The dollar is also traditionally seen as a “safe haven”, meaning it becomes more appealing in times of market uncertainty – like these.