Treasury Yields Jump After Fed's Hawkish Remarks

Though data showed that wholesale inflation was cooling more than expected, Treasury yields ticked higher this week after hawkish comments from Fed Governor Christopher Waller. He advocates for more monetary policy tightening to reduce inflation despite uncertainty over the fallout from the recent banking turmoil. Furthermore, the US central bank shrank again its balance sheet by about $17 billion last week. This is another form of monetary tightening, akin to raising short-term interest rates.

Fed fund futures slid below 94.95 (July 2023 futures contracts: 94.94) but the Federal Reserve is still expected to start cutting rates before year-end. December 2023 futures contracts closed at 95.435 despite Christopher Waller’s remarks. The yield on the benchmark 10-Year U.S. Treasury Note rose 12 basis points from 3.40% to 3.52% while the yield on the 2-year T-note hovered near 4.10%.

In Europe, the move was even higher. The yield on the German 10-year Bund rose 26 basis points week-over-week, from 2.18% to 2.44%, while the yield on the French 10-year OAT closed 30 basis points higher from 2.70% to 3.00%.

Rising yields had a detrimental effect on investment grade corporate bond prices. They were down 0.95% in Europe (IBOXX € Liquid Corporates Index) and down 0.25% in the U.S. (IBOXX iShares $ Investment Grade Corporate Bond Index).

By contrast, high-yield bonds edged up 0.29% in Europe (IBOXX € Liquid High Yield Index) and gained 0.62% in the U.S. (Markit iBoxx USD Liquid High Yield Capped Index).

Emerging debt in local currencies rose 0.50% while the dollar index fell below 101.60.