Treasury Yields Pushed Higher by Hawkish Fed

The Federal Reserve had previously indicated that incoming economic data, proving that inflation is on a consistent downward trajectory, would be needed to start reducing rates. This statement had chipped away at investor optimism for earlier rate cuts, leading to a surge in Treasury yields. Traders had priced out expectations for a June rate cut.

Concerns about rising yields were intensifying this week as Atlanta Fed President Raphael Bostic warned that the central bank could even hike interest rates if inflation remained sticky. The U.S. 10-year Treasury yield gained 10 basis points week-over-week from 4.52% to 4.62%. This is an increase of 74 basis points since the beginning of the year. The yield on the 2-year Treasury is now nearing 5%.

Futures traders have reduced their bets on how much the Federal Reserve will cut rates this year to the lowest level observed since October. Fed funds futures contracts for December reflected expectations of around 30 basis points.

Treasury yields also rose in Europe, even though they had dropped last week. The 10-year Bund yield gained 14 basis points to 2.50%. Ditto for the 10-year OAT yield which now exceeds the 3% threshold for the first time since November 2023.

Against this backdrop, the riskiest bond segments closed the week in negative territory.

In Europe, the IBOXX € Liquid Corporates lost 0.99%. In the U.S., the IBOXX $ Domestic Corporates index was down 0.70%. High yield bonds edged down 0.24% in Europe (IBOXX € Liquid High Yield Index) and their American peers slid 0.32% (Markit iBoxx USD Liquid High Yield Capped Index). Lastly, emerging debt in local currencies was down 1.26% while the greenback remained virtually unchanged week-over-week.

All these segments have shown negative performances since the beginning of the year, except for European high yield bonds, which are just slightly above zero (+0.65%). A small miracle under the current market conditions.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.