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US 10-year Treasury yield tops 1.7% as Fed forecasts reverberate

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Long-term US government bonds sold off in early European trading after the Federal Reserve lifted its growth and inflation forecasts but stuck to its plans to keep short-term rates low until at least 2024.

The 10-year Treasury yield, a key marker of borrowing costs for global financial markets, rose as much as 0.096 percentage points to 1.738 per cent as investors factored in stronger economic growth and price rises.

The yield has not held above 1.7 per cent since January 2020, before the market ructions triggered by the coronavirus crisis.

Treasuries that mature in 30 years were also under pressure on Thursday, with the yield rising as much as 0.09 percentage points to 2.51 per cent — the highest level since 2019. Short-term two-year notes were little changed, yielding 0.131 per cent.

Line chart of % showing US 10-year Treasury yield jumps to highest level in more than a year

Late on Wednesday, Federal Reserve policymakers increased their median projection for growth and inflation in the world’s biggest economy as US President Joe Biden’s $1.9tn economic stimulus and a swift rollout of vaccines boosts the outlook.

More members of the Federal Open Market Committee indicated that they expected a rate rise in 2022 or 2023 than had done so at a December meeting, but the median expectation was still for no increase to the federal funds rate until at least 2024.

The combination of more robust inflation, which erodes the appeal of the fixed-income payments bonds provide, with low short-term interest rates was seen by some analysts and investors as negative for medium and long-term bonds that are more sensitive to the broader economic outlook.

“We believe there is room for Treasury yields to rise further,” said Jay Barry, managing director of interest rate strategy at JPMorgan following the meeting. He said bonds of medium-length duration were particularly vulnerable.

US government bonds have been under strong selling pressure so far this year.

Long-term Treasuries have recorded negative returns of 13.7 per cent since the start of 2021 as of Wednesday’s close, when taking into account the sharp price fall and coupon payments. If the fall is sustained through the end of the month, it would mark the worst quarter on records stretching back to the late 1980s, according to a Bloomberg Barclays index.

Zhiwei Ren, portfolio manager at Penn Mutual Asset Management, said he expected a further increase in long-term rates over short-term ones.

“Everyone knows the economy is doing better. That pressure has to go somewhere,” he said.

Column chart of Quarterly total returns (%) showing Long-term US government bonds in historic sell-off
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