Treasury sell-off continues after divided Fed holds interest rates steady
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- 30-year Treasury yield jumped more than 9 basis points to 5.236%, hitting its highest level since July 2007 on Wednesday, while the 10-year yield rose over 8 basis points to 4.7% and the 2-year climbed 5 basis points to 4.289%
- Federal Reserve voted 9-3 on Wednesday to hold its key interest rate steady at 3.5%-3.75%, in only the second FOMC meeting under Chairman Kevin Warsh
- FOMC statement said economic activity is expanding at a solid pace despite elevated uncertainty tied in part to the Middle East conflict, noting job gains have kept pace and unemployment has changed little
- Deutsche Bank analysts still expect the Fed to raise rates by 50 basis points total this year — 25 bps each in September and December — but warned the FOMC will take little comfort from the market reaction
- Analysts flagged that the rise in long-end rates coupled with declining forward real yields suggests doubts about an imminent return of price stability, while a steeper yield curve could pressure the weak housing market
- Investors are awaiting Thursday's weekly jobless claims and the June PCE reading, with Dow Jones estimates projecting 3.7% headline inflation and 3.3% core inflation year-over-year
Why it matters: A 9-3 split on a hold decision — a rare degree of internal dissent — combined with the 30-year yield breaking above 5.2% to levels not seen since 2007 signals that bond markets are pricing in persistent inflation and further Fed tightening, even as Deutsche Bank economists still expect 50 basis points of hikes before year-end. The steeper yield curve risks further pressure on the housing market the FOMC itself flagged as weak.
