US 10-year yield hits highest level since last February ahead of Fed

A key US government bond yield rose to its highest level since last February on Wednesday as investors awaited clues from the Federal Reserve about how it will deal with an expected surge in economic growth.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, added 0.02 percentage points to 1.644 per cent in European trading. This yield, which sets the tone for borrowing costs worldwide, has climbed rapidly from about 0.9 per cent at the start of this year as markets anticipated a jolt of inflation from President Joe Biden’s $1.9tn stimulus and the rollout of coronavirus vaccines. So far, Fed chair Jay Powell has appeared relaxed about the moves.

At the conclusion of the Fed’s meeting later on Wednesday, analysts expect the central bank’s policymakers to upgrade their forecasts to reflect a turbocharged recovery for the US economy from the pandemic. Bond investors will also closely scrutinise policymakers’ communications around the timing of the first post-recession interest rate rise and the potential wind-down of its $120bn a month asset purchase programme that has supported financial markets since last March.

The Fed had a “communications challenge” around tapering stimulus that it would “seek to push back” against, said Silvia Dall’Angelo, senior economist at Federated Hermes. She added that bond markets were likely to stay volatile because the Fed’s move to average inflation targeting, which allows the central bank to be more tolerant of price increases overshooting temporarily, made it harder for investors to predict monetary policy.

“They have not stated exactly the extent of the overshoot they are comfortable with or for how long,” Dall’Angelo said. “From a market perspective this brings uncertainty and volatility.” 

Stock markets turned lower as Treasury yields edged up, with Europe’s Stoxx 600 benchmark and London’s FTSE 100 both losing 0.3 per cent. The dollar, as measured against a basket of currencies, traded flat.

Analysts at TD Securities forecast that a hawkish tone on rates and tapering could lift bond yields by a further 0.07 percentage points, although their base case was for the Fed to downplay the likelihood of sustained inflation.

Dickie Hodges, a bond fund manager at Nomura Asset Management, argued the central bank would not rush to tighten financial conditions while the US labour market was stricken by the pandemic.

“It will take time for wage pressure to feed through into a workforce that exhibits considerable slack,” Hodges said. Fed policymakers, he added, “have indicated that they are willing to tolerate much higher rates of inflation than are currently discounted by bond yields”.

In other markets, sterling added 0.2 per cent against the dollar to purchase $1.392 as traders looked ahead to the Bank of England’s latest rate-setting meeting on Thursday and gambled that it would once again hold back from reducing interest rates below zero.

Brent crude, the international oil benchmark, lost 1 per cent to $68.39 a barrel, responding to jitters in commodities markets generated by countries across Europe suspending AstraZeneca’s coronavirus vaccine.

Saudi Arabia, the dominant member of the Opec + group of oil-producing nations, was “willing to defend” keeping the oil price at $60 or above, analysts at Bank of America wrote in a research note, with Brent also unlikely to fall below this level because the US shale industry had moved from rapid expansion generated by unsustainable borrowing into a phase of “capital discipline”.