Long-term US Treasury yields have held onto most of the gains recorded after the Federal Reserve's latest decision, as a batch of fresh economic data signals that inflation remains elevated and the labor market continues to show resilience. The 30-year Treasury bond yield rose more than 10 basis points on Wednesday following the Fed's decision to hold interest rates steady, reaching its highest level since 2007, and remained around 5.20% on Thursday.
The US Treasury options market continues to see robust demand for hedging against the risk of further yield increases in the coming weeks. Economic data released on Thursday included the Personal Consumption Expenditures (PCE) price index, the Fed's preferred inflation gauge, which is based on June personal income and spending figures. The index slowed to 3.7% from 4.1% in May, matching economists' expectations. Since March 2021, this measure has exceeded the Fed's 2% target every month. Meanwhile, oil prices, which had retreated in June, have surged again after the US resumed its crackdown on Iran.
"If inflation does not slow down, there is a risk of further increases in long-term bond yields," said Jens Peter Sorensen, chief analyst at Danske Bank. "The market is still guessing how many more rate hikes are needed, and the timing of those hikes may be later than the market expects."
Although the Fed's rate decision was in line with expectations, the interest rate market had previously priced in about a 40% probability of a rate hike, with bets that newly appointed Chairman Kevin Warsh might use the opportunity to build his anti-inflation reputation. However, the Fed held steady, and market expectations for rate hikes in the coming months have diminished, pushing short-term Treasury yields down from multi-month highs reached earlier this month. During US trading hours on Thursday, yields on 2-year to 5-year Treasury notes fell by about an additional 5 basis points. This followed a decline in short-term UK gilt yields, after the Bank of England held rates steady, prompting traders to scale back bets on a September rate hike.
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