TOKYO- The yield on two-year US Treasury notes rose to a 17-year high of 5.1970 percent on Thursday, a day after the Federal Reserve held interest rates steady but stiffened its hawkish stance for future policy.
The 10-year yield rose to 4.4310 percent , a new 16-year peak.
The US central bank projected a further rate increase by the end of the year and expected monetary policy to be significantly tighter through 2024 than previously thought.
Fed Chair Jerome Powell’s “cautious view that a ‘soft landing’ is not even the base case may reflect the uncertainties of policy lag, especially alongside the possible need for more tightening,” Mizuho analysts wrote in a client note.
“Against this backdrop the case for higher front-end yields, with distinct upside bias to yield volatility may persist into Q3 and early Q4,” ahead of the next policy meeting in November, they wrote.
Money market traders now see better than 50 percent odds of a quarter-point hike by year-end, from around 40 percent probability before the Fed decision.
US stocks slumped after the US Federal Reserve held key interest rates unchanged as widely expected, and revised economic projections higher with warnings that the battle against inflation was far from over.
All three major US stock indexes retreated in the wake of announcement, with interest rate sensitive megacap stocks Microsoft Corp Apple Inc and Nvidia Corp pulling the Nasdaq down most.
The Fed’s announcement was accompanied by its Summary Economic Projections (SEP) and dot plot, which sees an additional 25 basis point rate hike this year, peaking in the 5.50 percent -5.75 percent range.
The SEP projections also called for 50 basis points of rate cuts next year.
“It’s your standard Fed day volatility,” said Ryan Detrick, chief market strategist at Carson Group in Omaha, Nebraska. “Yet it wasn’t really a curve-ball event, because markets took things in stride.”
“This day has had a bull’s eye on it all month and now we can move past it,” Detrick added.
The updated projections see the Fed funds target rate edging down to 5.1 percent by the end of next year, and to 3.9 percent by the end of 2025.
Since the Fed began tightening in March, core inflation has cooled. But its slow descent toward the central bank’s 2 percent target has been slow and uneven.
The SEP forecasts inflation to drop to 3.3 percent by year-end, and to approach the central bank’s average annual 2 percent target.
At the subsequent press conference, Fed Chairman Jerome Powell tempered rosier economic projections with a warning that inflation has a long way to go before reaching that target.
