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U.S. Treasury yields have been on a roller coaster in recent months. The yield on the 10-year U.S. Treasury rose to its highest level since 2007, but soon began to fall.
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Bond yields, which have helped curb inflation and have done much of the heavy lifting for the Federal Reserve, are once again hurting the central bank.
The rapid rise in long-term U.S. Treasury yields over the past few months has weighed down many investors’ portfolios and caused headaches for them. It became more expensive for governments to borrow money.
But their losses are Fed profits.Yields took time to increase Pressure from Fed officials to act before taking profits Providing new data Get a more complete picture of the current state of the economy.
Bond yields, or the yield on 10-year Treasury bills, determine interest rates on credit cards, mortgages, and auto loans. As these interest rates rise, it becomes more expensive to borrow money. The same is true if the Fed raises interest rates.
Federal Reserve Chairman Jerome Powell said: Press conference after this month’s meetingHe said he could not pinpoint exactly why yields have risen so much in recent weeks. But he added: “Perhaps most importantly, these higher Treasury yields are being expressed through higher borrowing costs for households and businesses, and will continue to weigh on economic activity as long as tightening continues.” Stated.
In addition to Chairman Powell, several other Fed officials have indicated that the Fed could afford to hold off on raising rates further at future meetings if yields remain high.
“We support the Fed’s decision to keep interest rates unchanged at its November meeting, citing the tightening financial and credit conditions that have occurred over the past few years,” St. Louis Fed Interim President Kathleen O’Neill Purse said Thursday. said. Three months. ” He added that this was reflected in “a rise in long-term government bond yields.”
The only problem is that yields don’t like to stand still.
Hours before Powell’s post-meeting remarks, bond yields plunged following the Treasury’s quarterly repayment announcement. To the surprise of investors, the Treasury Department announced it would auction slightly fewer bonds than expected. In addition, Mr. Powell’s comments helped convince Wall Street that the Fed was done raising rates, even if he didn’t say so explicitly.
John Maziire, head of U.S. Treasuries at Vanguard, said Fed officials “have always given themselves a choice, and it’s hard to suggest that they’re done raising rates, especially given the growth data and the strength of the labor market.” It will never happen.”
But the Fed’s latest statement, which added that “financials” in addition to credit conditions were also contributing to the slowdown, “suggests that markets have played a role for the Fed.” said Joe Kalish, principal global macro strategist at Davis Research.
that The yield sent is an even number lower. From Oct. 19 to Nov. 8, the 10-year Treasury yield fell from nearly 5% to about 4.5%, the highest level since 2007.
That is a de facto interest rate cut.It was quickly translated as Mortgage interest rates fell sharply last week, which was the biggest decline in a year. Lowering mortgage rates is especially counterproductive at a time when the economy remains at risk of overheating and the Fed is fighting valiantly to bring inflation down to its 2% target.
But some Kalish told CNN that investors have seen things differently. He said he was relieved that the Fed seemed less likely to “overstretch the economy and push it into recession.”
This has “put the Fed in a bind,” Bank of America economists wrote in a note Friday.
This helps explain why Powell did this. shatter investors’ beliefs The Fed is done hiking.
“We know that continued progress toward the 2% target is not guaranteed. Inflation has given us some It’s causing a situation.” “If it becomes appropriate to further tighten policy, we will not hesitate,” he said.
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U.S. Federal Reserve Chairman Jerome Powell previously said in remarks at Thursday’s International Monetary Fund meeting that central banks may not be done raising interest rates yet, but he doesn’t mean it in the name of business. I told you something.
This immediately pushed yields higher, wiping out what would have been the S&P 500’s longest single-day gain since 2004 as more investors began to anticipate rate hikes at the year’s final Fed meeting. Ta.
“Going forward, much of the progress in controlling inflation may have to come from tight monetary policy,” Powell said. That’s in contrast to letting bond yields do the Fed’s job.
Economists at Bank of America said the central bank “will have to accept a cyclical relationship between monetary tightening and responses to monetary tightening.” In other words, the Fed will need to be more careful not to undo monetary tightening when it occurs in bond markets, signaling to investors that this is an alternative to raising rates.