Financial Insights

U.S. 2-year Treasury yield reaches 18-month high

SINGAPORE, 12 OCTOBER.

On Tuesday, two-year Treasury yields hit an 18-month high as investors sold US debt, fearing that rising energy prices would fuel inflation and increase pressure on the Federal Reserve to raise interest rates. Prices for natural gas, coal, oil, and other commodities have risen sharply in recent weeks, and there is mounting evidence that costs are spreading throughout supply chains.

After resuming trade in Asia following the United States’ Columbus Day holiday on Monday, two-year yields rose 3.6 basis points to 0.3560 percent, before easing slightly to 0.3497 percent. The sell-off in two-year Treasuries has now reached its sixth session. The yield was at its highest level since late March 2020, when investors sold debt in the days following the Federal Reserve’s decision to cut its key interest rate to near zero.

“It’s part of a global phenomenon,” said Shane Oliver, chief economist at AMP Capital in Sydney, “with worries about inflation spiking further on the back of higher energy prices.”

“There’s a possibility that this will push Fed tightening forward,” he said, though he does not believe the Fed will be in a hurry to raise rates.

In Asia, five-year yields rose nearly 4 basis points to 1.095 percent, the highest since late February 2020, and benchmark 10-year yields rose to 1.6310 percent, a four-month high.

The 10-year yield has now risen about 30 basis points in three weeks, with even last week’s weaker-than-expected US labor data failing to stop the sell-off or shake markets’ belief that the Fed will start raising rates next year.

Bonds are also under pressure, with 10-year bond yields rising 20 basis points in three weeks, 10-year Australian government bond yields rising nearly 50 basis points in the same time frame, and even anchored 10-year Japanese yields rising 5.5 basis points.

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