Yields surge on rising expectations of Fed rate hikes

Posted on Posted in Financial Trends, Investment & Financing, Market Updates

Two-year yields surge to decade highs as 2 hikes priced in but divide remains for peak rate: Fed sees 3.4%, market 2.8%

For the world’s biggest bond market, 2019 is turning into a battleground for bets on the path of U.S. monetary policy. Treasury yields are rising across the curve, even as skepticism lingers about whether the Federal Reserve will hike as aggressively as policy makers anticipate.

Two-year U.S. rates on Wednesday climbed to levels unseen in more than a decade, while a selloff in the past two days is driving the benchmark 10-year yield above 3 percent and near its highs for the year. Investors in recent weeks have moved closer to the Federal Reserve’s projected path of three rate hikes next year and are now pricing in two, following expected increases next week and in December.

The resolution of the debate over the course of interest rates could prove to be a slow meeting in the middle of the two camps. But it may also deliver a painful blow to bond bulls or even the Fed’s credibility. Either way, the standoff sets the stage for heightened turbulence in debt markets after one of the most subdued stretches in decades.

“There’s a view that the Fed has largely converged to the market,” said Jan Hatzius, chief economist at Goldman Sachs Group Inc. “From 2012 to 2016, that was true. The period before that it wasn’t true, and the period since then it hasn’t been true.”


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