US 30-Year Treasury yield hits 19-year high as Fed believed to fall behind in combating inflation

The Fed is believed to be not sufficiently resolute in fighting inflation despite maintaining rates at its latest meeting, driving selling pressure in the US bond market and pushing long-term bond yields like the 30-Year Treasury yield to historic highs.

The Fed maintained its policy rate within expectations at the 3.5-3.75% range on Wednesday in a decision approved by a vote of nine to three.

Cleveland’s Beth Hammack, Minneapolis’ Neel Kashkari, and Dallas’ Lorie Logan voted in favor of hiking rates by 25 basis points during the two-day meeting of the Federal Open Market Committee.

Fed Chair Kevin Warsh reassured that the bank is committed to ensuring price stability, with no easing of the inflation target on the horizon.

Warsh reiterated the strong commitment to the 2% inflation target but avoided further guidance, while he said nominal and real interest rates rose across the entire US Treasury yield curve in the 42 days since the last meeting.

Long-term yields surged after these remarks as they move in response to inflation and growth estimates.

Analysts say this could be a sign that investors are concerned that the Fed may not be doing enough to bring inflation under control.

Warsh’s stance, perceived as reluctant to take hawkish steps, raised concerns over the bank’s determination and credibility in fighting inflation.

The US 10-Year Treasury yield rose eight basis points to 4.69% on Wednesday and continued the trend, trading at 4.7% on Thursday, while the 30-Year Treasury yield saw its highest in 19 years at 5.2369% at the same time.

The yield spread between the two-year and 30-year yields widened due to the rise in long-term yields, highlighting expectations that the Fed may not act very aggressively in the short term.

Tim Waterer, a chief market analyst at Australian KCM Trade Global, told Anadolu that the rise of the 30-Year yield to its highest since 2007 reflects the market expectation that inflation will remain high for longer than the Fed expects, as the bank remains cautious and takes a phased approach to rate hikes but the long end of the yield curve is pricing in the eventual need for more aggressive tightening especially due to the sustained rise in oil prices.

Waterer stated that the rise in long-term yields indicates investors believe inflation will be persistent enough to prompt the bank to adopt a more hawkish policy than it signaled so far.

“The combination of elevated energy costs and the Fed’s measured approach is creating a clear divergence between the central bank’s current messaging and what the bond market is preparing for,” he said. “Higher long-term US yields have clear global implications.”

“They put upward pressure on borrowing costs worldwide, support the US Dollar, and can weigh on risk assets, especially growth stocks and emerging markets that are sensitive to tighter financial conditions. If the 30-year yield continues to climb, it risks becoming a meaningful headwind for global equities and a further source of volatility in currency markets,” he added.