US 10-Year Treasury Yield nears 5% after Fed rate hike, Middle East tensions raise inflation fears
- US Treasury Yields pare losses in Thursday’s early European session.
- The Fed raised interest rates by a quarter percentage point and signaled an additional hike later this year.
- Iran vowed to fight on “until the last drop of blood.”
United States (US) Treasury Yields erase an earlier decline during the early European session on Thursday. Federal Reserve (Fed) interest rate hike and escalating geopolitical tensions in the Middle East could lift US Treasury Yields in the near term.
Two-year US Treasury yields, the most sensitive to the Fed’s policy, rebounds to trade at 4.717% after the Fed policy meeting. Meanwhile, the benchmark 10-year US Treasury yield note reverse an earlier decline to 5%. The yield hit its highest since 2007, reaching 5.041%, in the previous session.
The US central bank raised its benchmark interest rate by a quarter-percentage point at its September meeting on Wednesday, marking its first rate hike since July 2023. During the press conference, Fed Chairman Kevin Warsh delivered hawkish signals, warning of persistent inflation risks and signaling further increases in borrowing costs in coming months.
A prolonged conflict in the Middle East, particularly tensions involving Iran, has fueled concerns about higher energy prices and inflation, putting upward pressure on Treasury yields. On Wednesday, Iran vowed to fight on “until the last drop of blood” after threatening the US that peace talks will not resume until all of its conditions are met, per Reuters.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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