US Treasury yields ease after CPI, but Fed hike risks linger
- US 10-year yield slips but remains sharply higher for the week.
- Thirty-year yield eases after touching its highest level since 2007.
- Fed hike odds hit 91% as inflation expectations climb.
US Treasury yields fall during the North American session following the release of US inflation data, but are poised to finish the week higher. The US 10-year Treasury yield is down 1 basis point to 4.951% but has gained over 16 basis points, or 3.49%, in the week.
US yields cool, but the week’s inflation scare still bites
The US 30-year yield falls two basis points at 5.34% after hitting its highest level since 2007 at 5.38%, due to surging Oil prices, fueled by the escalation of the US-Iran conflict, which has spread to Yemen, Houthis versus Saudi Arabia.
Recent US inflation data were mostly aligned with estimates, except for core CPI, which was in line with forecasts but ticked lower. Despite this, the red-hot PPI report a day ago and the surge in US yields this week ignited a Fed-hawkish repricing.
Money markets had priced in a 91% chance for a 0.25% rate increase by the Federal Reserve at the September 15-16 meeting.
Other data revealed that US consumers are becoming pessimistic about the economy and now expect higher prices due to a resurgence in fuel prices and rising trade tensions, particularly between the US and Canada.
In the meantime, the US Dollar Index (DXY), which tracks the performance of a basket of six currencies against the Greenback, clings to 99.00, up a minimal 0.05%.
In the meantime, the US financial markets' five-year inflation expectations are at 2.46%, up from 2.37% at the beginning of the week, according to the 5-year Breakeven Inflation Rate. For 10 years, the 10-year Breakeven rate fell from 2.35% to 2.4%, suggesting markets expect medium-term inflation to rise.
Traders' focus on the Fed’s meeting, Warsh presser
Next week, traders will focus on the FOMC monetary policy decision. Alongside this, they will monitor jobs and housing data, the NY Fed Empire State Manufacturing Index, Retail Sales and Fed officials' speeches.
US 10-year Treasury note yield
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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