The sell-off in US government bonds intensified on Thursday after Federal Reserve Governor Christopher Waller suggested that additional interest-rate increases might be necessary to curb inflation, though he left the timing of such moves open. The 10-year Treasury yield climbed six basis points to 5.34%, approaching its highest level since 2002, while the 30-year yield rose five basis points to 5.71%, near a 24-year peak. The two-year yield also gained five basis points to 4.81%.
Waller, speaking at a Central Bank of Turkey forum in Istanbul, said he expects further rate hikes will likely be required if economic data continue to align with projections. He noted that a hike might not occur at the Federal Reserve's October meeting, but emphasized that increases do not need to come at consecutive meetings, as long as they are implemented within an acceptable timeframe. His comments added fresh pressure to the bond market, which had stabilized in the previous session following a strong auction of 10-year Treasury notes.
The remarks come as inflation has remained above the Fed's 2% target for over five years. At its September meeting, the central bank raised its benchmark rate to 3.75%-4.00%, the first increase since July 2023, citing signs of stronger economic momentum. Minutes from that meeting, released Wednesday, revealed a divided policymaker group: some officials viewed higher rates as essential to mitigate energy and other price shocks, while others were more concerned about emerging demand-driven inflation.
Investors have been recalibrating their expectations for future Fed action. On Wednesday, markets priced in roughly a 20% probability of a quarter-point increase at the October 27-28 meeting, down from about 70% in the days following the September decision. However, a rate hike at the December 9 meeting is now widely anticipated. Waller's comments could reinforce the view that the central bank will need to maintain a restrictive policy stance for an extended period to contain price pressures.
Adding to inflation concerns, oil prices have climbed, with Brent crude futures hovering around $105 a barrel. Higher energy costs feed directly into consumer prices and exacerbate the bond market's woes, as investors demand higher yields to compensate for inflation risk and increased government borrowing.
The renewed bond-market pressure follows a $39 billion sale of 10-year Treasury notes on Wednesday, which produced a yield of 5.30%, the highest since 2000, and helped stabilize yields during that session. The government also sold $58 billion of three-year notes on Tuesday. On Thursday, the Treasury is scheduled to auction another $22 billion of 30-year bonds, providing another test of investor demand for longer-dated US debt.
Treasuries have remained under pressure since the onset of the war in Iran, with inflation concerns, increased government borrowing, and elevated term risk weighing particularly heavily on longer-dated securities. The combination of higher oil prices, renewed expectations for additional Fed tightening, and continued government borrowing is keeping the bond market on edge, with the 10-year yield once again approaching levels not seen in more than two decades.
This article is for informational purposes only and does not constitute financial advice.
