The 10-year U.S. Treasury yield, which serves as a benchmark for mortgage rates, has reached its highest level in 2023. This surge is a result of growing expectations that the Federal Reserve will maintain higher interest rates for an extended period to combat inflation.
Inflation Data Sparks Rise in Yield
After the publication of the latest consumer price index (CPI) data, which indicated an end to the declining trend in inflation, the yield on the 10-year Treasury climbed above 4.23%. This marks its highest level since November of last year, up from 4.02% just last Thursday.
Borrowing Costs Continue to Increase
Analyst Henry Allen from Deutsche Bank highlights that borrowing costs are still becoming more restrictive in real terms. The primary driver behind rising yields is the belief that the Fed will keep policy in restrictive territory for a longer duration than previously anticipated. As a result, markets are reevaluating and adopting a more hawkish stance towards the policy path.
Concerns Mount Over Rising Inflation
The latest CPI print reveals a year-over-year increase of 3.2%, fueling worries that the period of steady price-growth slowdowns has come to an end. Inflation remains well above the Federal Reserve’s target of 2%, leading to an upward trajectory in Treasury yields across the curve. Additionally, traders are now placing higher bets on a more aggressive Fed approach.
Future Rate Expectations Adjusted
Futures markets now indicate a higher likelihood that the Fed will maintain rates at the current 5.25%-5.5% level for a more elongated period or potentially even raise borrowing costs further. The CME FedWatch Tool reveals increased chances of rates remaining at their current level during the January, March, May, or June 2024 meetings. Moreover, the likelihood of a quarter-point hike during one of these meetings has nearly doubled since the previous week, with a 25% chance of the upper bound of rates reaching 5.75% by January.
Impacts on Stocks and Mortgages
Elevated Treasury yields are currently exerting downward pressure on stocks and dampening risk sentiment among investors. Both the Dow Jones Industrial Average and S&P 500 are heading for losses in this environment. Furthermore, if expectations of higher rates persist, mortgages may also face significant pressure.
