Interest rates at the front end of the U.S. Treasury yield curve have pushed higher in response to the prospect of a Federal Reserve rate hike as early as September this year.
Two-year Treasury yields have increased by 85 basis points, to 4.23%, since the last day of trading before the Iran war.
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That was nearly matched by 5-year yields increasing by 78 basis points, to 4.29%, leaving a slight kink in what normally would be smooth upward sloping yield curve.
Farther out the curve, the yield on the benchmark 10-year bond pushed 57 basis points higher, to 4.51%, while the 30-year note increased by 34 basis points, to 4.95%.
The yields on both the 10-year and 30-year have moderated from recent peaks, which has reduced the yield spread between the long and short ends of the curve.
And while the bond market’s mini-rally at the far end of the curve is conducive for long-term business investment and the mortgage market, the drop in long-term rates also signals concern over the impact of entrenched inflation on economic growth.
The takeaway
The Treasury market is pricing in a more hawkish stance of the Federal Reserve under its new chair, Kevin Warsh.
Instead of a selloff at the long end of the curve, the yields of 10-year and 30-year bonds have moderated relative to the increase in yields at the front end of the curve in response to the prospect of a tightening of monetary policy.
