Stock futures slide as 10-year Treasury yield tops 5% ahead of Fed decision

The 10-year US Treasury yield surpassed the 5% mark on Monday, marking the highest level since October 2023. This surge in yields was fueled by escalating energy prices, concerns over inflation, and heightened expectations that central banks would maintain higher interest rates for an extended period. The benchmark yield momentarily reached 5.011% before settling below 5%.

The jump in yields could have ripple effects on mortgages, corporate loans, and other forms of credit, potentially dampening economic growth. Simultaneously, bonds became relatively more appealing compared to highly valued equities. This rise in yields came after the US Treasury announced the enlargement of its bond-buyback program, expanding it to up to $6 billion for debt maturing within 10 to 20 years.

The 30-year US Treasury bond yield also remained close to its peak since 2007. The sell-off in bond markets extended across Europe, with France's 10-year government bond yield climbing to 4.50%, Italy's reaching around 4.40%, and Germany's Bund yield surging to 3.538%, the highest in 15 years. The ongoing increase in energy prices is a significant contributing factor, with Brent crude reaching around $107 a barrel and US West Texas Intermediate trading near $103 as attacks on Saudi energy infrastructure and shipping in the Gulf compounded supply concerns through the Strait of Hormuz.

The European Central Bank recently raised its deposit rate by 25 basis points to 2.5% and expressed concerns that inflation could remain above its target for an extended period. Investors are pricing in at least one more ECB interest rate hike this year. The focus now shifts to three major central bank decisions: the US Federal Reserve on Wednesday, the Bank of England on Thursday, and the Bank of Japan on Friday.

According to a Reuters poll, 85% of economists anticipate a 25 basis point rate increase from the Fed, with money markets placing the probability of an increase at approximately 93%. The BoE is expected to maintain rates as they are, while economists surveyed by Reuters unanimously forecast no change at the BoJ.