US bond yields rise to 16-year high above 5% for first time after 2007 on hawkish Fed Reserve policy

The benchmark US 10-year US Treasury bond yields rose above the 5 per cent -mark for the first time since 2007 on Monday, October 23, touching its 16-year high level after the Federal Reserve reiterated its hawkish stance to anticipate more rate hikes this year.

While the benchmark yield eased back from that level, it posted its largest weekly surge since April 2022, powered by strong economic data. Bond yields surged by almost 30 basis points last week.

Federal Reserve Chair Jerome Powell said last week that inflation in the US remains too high and bringing it down to the Fed's 2 per cent target level will likely require a slower-growing economy and job market. Powell's remarks appeared to push back against market expectations that the rate hikes by the US central bank had reached an end.

"We are attentive to recent data showing the resilience of economic growth and demand for labor. Additional evidence of persistently above-trend growth, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy," Powell said in remarks to the Economic Club of New York.

The Euro zone government yields rose sharply on Monday as a sell-off in global bond markets resumed, taking the yield on the global-benchmark 10-year US Treasury note to a 16-year high mark.

The surge in US bond yields is the latest stage of a relentless sell-off in government bond markets, driven by investors accepting central banks will keep rates persistently high, particularly in the United States, an increase in supply of bonds and widening term premia.

Also Read: US 10-year bond yields near 16-year high. How can it impact Indian stock market?

Besides that, the risk of Israel's war on the Islamist group Hamas becoming a wider regional conflict is keeping markets on edge, as Israeli air strikes battered Gaza early on Monday, and the US dispatched more military assets to the region. The US dollar index was steady at 106.1, with the euro up 0.1 per cent at $1.06075, and sterling flat at $1.2170. The dollar has been underpinned by the steady rise in yields at the long end of the US Treasuries curve.

Market analysts say bond yields have been rising because of the current trend of higher interest rates. This is also seen as an indirect signal of sticky inflation and the anticipation of a potential economic slowdown, which in turn makes the cost of borrowing money higher.

Additionally, an increased bond supply and and macro as well as geopolitical uncertainty have also contributed to the rise in bond yields.

"The recent surge in nominal long-end yields has been led by: (1) increased supply in recent quarters, (2) higher real yields (which rose as markets faded recession risks) contributing more than inflation expectations (which have trended down amid negative inflation surprises in recent months), and (3) Fed repricing and soft landing narrative leading to higher term premia," observed Madhavi Arora, Lead Economist at Emkay Global Financial Services.

Back home, the rupee dropped 6 paise to 83.18 (provisional) against the US dollar on Monday due to sharp losses in local stocks and surging US bond yields.

At the interbank foreign exchange market, the local unit opened lower at 83.13 and traded in a tight range of 83.19 and 83.09 against the greenback during the day. Analysts said hardening US bond yields amid a higher risk of broader conflict in the Middle East weighed on emerging currencies and riskier assets.