Surging oil prices and Fed rate-hike fears fuel broad bond selloff
30-year yield at 5.26%; September rate-hike odds jump from 41% to 64% in a week
Warsh's hawkish remarks reshape outlook as markets eye jobs data, CPI
A broad selloff in US Treasuries pushed the 10-year yield above 4.75% during trading Monday, its highest level in 19 months, as rising oil prices stoked inflation fears and Federal Reserve Chair Kevin Warsh's hawkish remarks raised the prospect of further interest rate hikes.
The 10-year Treasury yield surged past 4.75% intraday Monday (local time), according to Bloomberg, reaching its highest level since January last year.
Bond prices and yields move in opposite directions. As concerns grew that the Fed could raise rates, more investors moved to sell Treasuries, pushing market yields higher.
The selloff spread across maturities. The 5-year yield also climbed to its highest since early last year, while the 30-year yield rose 5 basis points — one basis point equals 0.01 percentage point — to 5.26%.
Oil prices added to the pressure on bonds. International crude soared nearly 3% to an intraday high after President Donald Trump signaled the possibility of further strikes against Iran.
The prospect of higher oil prices reigniting US inflation added weight to expectations of additional Fed tightening. Long-term yields held at elevated levels despite month-end bond index rebalancing, showing little sign of retreating.
The sharp shift in bond market sentiment began after Warsh's remarks at the Jackson Hole symposium.
Speaking at the symposium on Friday (local time), Warsh signaled that the Fed could raise its benchmark interest rate further to bring inflation under control. Short-term Treasury yields spiked in the aftermath as markets rapidly priced in the possibility of a rate hike.
According to the CME FedWatch tool, the probability of the Fed raising its benchmark rate by 25 basis points at the Oct. 16 FOMC meeting stood at 64.2% as of Monday.
That was up 22.8 percentage points from 41.4% just a week earlier.
Wall Street rate forecasts are also shifting. Following Warsh's comments, Barclays and Societe Generale both revised their earlier calls for no rate hike this year.
Markets are now focused on upcoming US employment and inflation data. If the August jobs report due this week and the consumer price index due Oct. 11 come in stronger than expected, expectations for a Fed rate hike could intensify, pushing Treasury yields even higher.
sjy@heraldcorp.com
