US 10-year yield crosses 5% rubicon as Fed hike looks locked
The US 10-year Treasury yield has breached the 5% threshold for the first time since 2023, rising by over 4 basis points as investors had almost fully priced in a 25-basis-point rate hike by the Fed on September 16. At the time of writing, the US 10-year is at 5.006%
The US 10-year Treasury yield has crossed the 5% mark for the first time since 2023, climbing by more than 4 basis points in anticipation of a Federal Reserve rate hike on September 16. Currently, the yield stands at 5.006%. Market forecasts indicate a 93% probability of a rate increase, as reflected in money markets. This surge in yields has bolstered the US dollar, with the US Dollar Index (DXY) rising by nearly 0.60% to 99.66.
Investors are eagerly awaiting economic projections and the Federal Reserve's "dot-plot" to gauge the potential trajectory of the Fed funds rate. Geopolitical tensions, including the US-Iran conflict and the attack on Saudi Arabia's East-West pipeline, have contributed to rising oil prices and heightened concerns about potential supply disruptions.
Interest rates, set by central banks based on base lending rates, impact borrowing costs for consumers and businesses. Central banks typically adjust rates to maintain price stability, often targeting an inflation rate of around 2%. If inflation falls below the target, central banks may lower rates to spur economic growth. Conversely, if inflation exceeds 2%, central banks may raise rates to curb inflation.
Higher interest rates tend to strengthen a nation's currency, making it more appealing to international investors. Conversely, rising rates can depress the price of gold, as it increases the opportunity cost of holding the precious metal instead of earning interest elsewhere. The Federal Reserve's funds rate, set during FOMC meetings, influences borrowing costs across the economy.
Market expectations for future Fed funds rates are tracked by the CME FedWatch tool, which informs financial market behavior. The AUD/USD pair experienced a one-and-a-half-week low around 0.7140, while the USD/JPY pair rose towards the 154.00 mark during the Asian session. Gold prices have been on a downward trend, nearing multi-week lows, amid speculation of an interest rate hike and concerns over rising oil prices. Bitcoin and Ethereum have shown modest gains, while Ripple maintains support levels.
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