US 10-year debt yield jumps to 2% after inflation data release


The US 10-year Treasury yield on Thursday climbed to 2 per cent for the first time since August 2019, as investors ditched government debt on the latest evidence of stubbornly high inflation.

The benchmark bond yield, which serves as a reference point for financial assets across the globe, has risen 0.5 percentage points so far this year. Investors are positioning themselves for a series of interest rate rises and the end of large-scale bond purchases by the Federal Reserve, but crossing 2 per cent marks a significant milestone for traders.

The jump came after the Bureau of Labor Statistics reported that the consumer price index had risen 7.5 per cent in January from a year earlier, the fastest pace of US inflation in 40 years.

“It is a challenging time to be a central banker, especially as it now seems that policymakers have been too relaxed on inflation over the past six months,” said Alastair George, chief investment strategist at Edison Group. “Sharply rising government bond yields represent a pre-tightening of financial conditions well ahead of any official interest rate increases.”

Benjamin Jeffery, an analyst at BMO Capital Markets, said the 2 per cent threshold was also “technically significant given the market’s fondness for round numbers”.

Line chart of intraday high (%) showing 10-year Treasury yield breaches 2 per cent

Short-dated yields, which are highly sensitive to interest rate expectations, surged on Thursday. The two-year Treasury yield rose to its highest level since January 2020, up about 0.2 percentage points on the day to a high of 1.59 per cent.

“US inflation has consistently beaten expectations and today’s inflation release saw more of the same,” said Jai Malhi, global market strategist at JPMorgan Asset Management. “This provides a significant challenge for the Fed as it aims to keep price increases under control while at the same time sustaining the economic expansion.”

Following the release of the January CPI report, traders increased bets on interest rate rises. The futures market now shows investors pricing in six quarter-point interest rate hikes by December and growing odds of a 0.5 percentage point increase in March.

This year’s surge in US bond yields has come as the outlook for inflation over the medium and long term is relatively subdued, having fallen since November 2021. Inflation is expected to clock in under 3 per cent both five and 10 years in the future, according to break-even rates derived from trading in inflation-protected Treasuries. The trend suggests investors are pricing in a sanguine economic outlook in the years to come, despite the expectation that the Fed will sharply raise interest rates this year.

Some analysts also argue that Treasury yields have been driven higher this year by increased supply. The Fed had been purchasing $120bn worth of government bonds and mortgage-backed securities a month until November 2021, when chair Jay Powell announced that the central bank would begin winding down the programme. In November, the Fed reduced its monthly asset purchases by $15bn a month before doubling the pace in December.

Additional reporting by Joe Rennison in New York


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