US 10-year yield crosses 5% rubicon as Fed hike looks locked
- US 10-year yield tops 5% for first time since 2023
- Fed hike odds reach 93%, lifting Dollar toward weekly highs
- Dot-plot and energy shock now shape post-FOMC yield path
The US 10-year Treasury yield has breached the 5% threshold for the first time since 2023, rising by over 4 basis points as investors had almost fully priced in a 25-basis-point rate hike by the Fed on September 16. At the time of writing, the US 10-year is at 5.006%
US Dollar climbs as traders almost fully price September Fed hike
Money markets are pricing in a 93% chance of a rate hike, according to Prime Terminal. The jump in US yields is underpinning the Greenback, which, as measured by the US Dollar Index (DXY), is up nearly 0.60%.
The DXY, which tracks the performance of the dollar against six currencies, is at 99.66, after bouncing from 99.07.
Besides the Fed’s decision, investors await an update of the economic projections and the ‘dot-plot’, which could lay the blueprint for the future of the Fed funds rate.
The rise in energy prices due to the escalation of the US-Iran conflict and the Houthis' attack on the Saudi Arabia East-West pipeline triggered a rise in Oil prices amid growing concerns about possible supply disruption.
US 10-year Treasury yield daily chart
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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