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As Treasury yields rise, Wall Street predicts what the Fed will do next


What will happen next to bond yields and interest rates? And how should that influence what investors do with their spare cash?

Bond yields began moving higher in earnest early last year in response to a series of interest rate hikes by the Federal Reserve. Earlier this month, the yield on the benchmark 10-year U.S. Treasury note hit its highest level in 16 years, while yields on shorter-term debt securities also rose.

That makes it a very attractive place for investors to park their money. Stocks have taken a hit as investors adjust their portfolios to take advantage of more attractive bond yields.

Yields climbed again Friday morning after the stronger than expected September jobs report. The yield on the two-year Treasury note
BX:TMUBMUSD02Y
rose to almost 5.1%, up from 5.023% Thursday afternoon and up from 4.26% a year ago.

‘Bond yields rose primarily because the Fed pivoted to a much more hawkish position, as investors anticipated aggressive interest rate hikes to rein in inflation.’


— Bill Merz, U.S. Bank Wealth Management

The yield on the ten-year Treasury note
BX:TMUBMUSD10Y
climbed to 4.86%, up from 4.715% Thursday afternoon, and up from 3.82% a year ago. The yield on the 30-year bond
BX:TMUBMUSD30Y
reached 5.01%, up from 4.88% on Thursday and up from 3.78% a year ago – heading Friday morning for the highest level since August 2007.

But will rising yields influence the Federal Reserve decision making on interest rates? Some analysts say yes.

Steen Jakobsen, Saxo Bank’s chief investment officer, said officials will began mulling rate cuts in 2024, while the spike at the long end of the yield curve will eventually nudge the Fed to take action “first through flagging a needed policy shift that keeps the ten to thirty-year yields capped at perhaps 500-525 basis points (5.0%),” he wrote in a note.

“Bond yields rose primarily because the Fed pivoted to a much more hawkish position, as investors anticipated aggressive interest rate hikes to rein in inflation,” Bill Merz, head of capital markets research at U.S. Bank Wealth Management, said this week.

On Thursday, Mary Daly, president of the San Francisco Fed, told the Economic Club of New York that the jobs market and consumer prices are two factors in the Fed’s thinking. “If we continue to see a cooling labor market and inflation heading back to our target, we can hold interest rates steady and let the effects of policy continue to work,” she said.



Read More: As Treasury yields rise, Wall Street predicts what the Fed will do next

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