Treasury yields aren't acting like the Fed is done hiking interest rates

By Vivien Lou Chen

A 5% 10-year yield is seen as risk by ING ahead of Wednesday's CPI inflation report

The benchmark 10-year Treasury yield is doing something it hasn't normally done in the past, by continuing to climb long after the Federal Reserve was presumably done with lifting U.S. interest rates.

The yield BX:TMUBMUSD10Y has "not been trading in a manner consistent with prior peaks" in U.S. interest rates, according to Padhraic Garvey, regional head of research for the Americas at the Netherlands-based bank ING. "Extrapolate that and 5% is a risk" for the 10-year Treasury rate, he wrote in a note - a level last seen in October.

Worries over a more aggressive selloff in long-dated U.S. government debt have surfaced this month as a result of stronger-than-expected manufacturing- and jobs-related data that have cast doubts on the Federal Reserve's ability to cut rates in three quarter-point increments by December.

Read: Fed-funds futures point to doubts over June rate cut as inflation data looms

The last time policy makers hiked interest rates was on July 26 of last year, when they pushed the fed-funds target rate to between 5.25% and 5.5%, or what was then a 22-year high. In November, Fed Chairman Jerome Powell hinted that the central bank was done with rate hikes; by the following month, Fed officials had penciled in three quarter-point rate cuts for 2024.

Traders began the year with expectations of up to six or seven rate cuts, have since scaled that back to two or three cuts, and are now in the process of pushing their expectations for those moves into the second half of this year. As recently as last week, Powell, appearing at an event at Stanford University, said the Fed broadly expects inflation to decline by enough to keep 2024 rate cuts intact despite stronger-than-anticipated economic activity.

Meanwhile, the 10-year yield hasn't fallen by anything close to what would be expected if the Fed was actually finished hiking interest rates, according to Garvey. Instead, three months after the Fed's last rate hike in July, the rate touched a cycle high of 5% in October, and it has remained elevated to this point.

See also: Suddenly, expectations for Fed rate cuts are all over the place

"Had a Martian alien landed on earth and simply eyeballed the current movement of the 10-year yield, [it would] likely conclude that the Fed had not peaked at all," the researcher wrote. Firm labor-market data and bumps in inflation data have "muddied the water."

Last year, RBC Wealth Management technical strategist Robert Sluymer identified a 10-year yield above 5% as the level at which the stock market would likely correct. At the very least, 5% is regarded by others as a mark that tends to make government debt look more appealing relative to equities for investors.

On Monday, major U.S. stock indexes DJIA SPX COMP ended mostly lower as 10- and 30-year Treasury yields finished at 4.422% and 4.552%, respectively - their highest 3 p.m. Eastern time levels since Nov. 24. Each yield is up by more than half a percentage point this year.

-Vivien Lou Chen

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

04-08-24 1601ET

Copyright (c) 2024 Dow Jones & Company, Inc.