Concerns Over Inflation... U.S. Long-term Treasury Yields Hit 'Highest in Six Months'

Impact of Fed's Adjustment in Rate Cut Pace Next Year

Wall Street: "Focus on Jerome Powell More Than Trump"

The U.S. bond market is seeing a rise in long-term yields following the Federal Reserve's (Fed) outlook for adjusting the pace of rate cuts next year. The yield on the U.S. 10-year Treasury note has reached its highest level in the past six months.

On the 21st, the Financial Times (FT) reported that the yield on the U.S. 10-year Treasury note rose by 0.09 percentage points to 4.59% from the previous day. This is the highest level in the past six months. Although the Fed cut rates by 0.25 percentage points that day, the market is reacting more sensitively to the reduced scope of rate cuts next year and high inflation forecasts.

Typically, long-term Treasury yields are sensitive to future rate outlooks. Especially when there is a possibility of sustained inflation, investors demand higher Treasury yields to reflect inflation risks.

Previously, the Fed raised its inflation forecast for next year and reduced the rate cut outlook from 1.0 percentage points to 0.5 percentage points. This is interpreted as a strategy to cushion the impact of fiscal policy easing ahead of President-elect Donald Trump's inauguration next year. Akshay Singhal, head of short-term rate trading at Citigroup, analyzed, "The market had hoped the Fed would leave room for additional rate cuts, but this decision increases the likelihood of rates being held steady for a period."

On the same day, the dollar rose 0.3% against major currencies in the New York foreign exchange market, continuing its highest level since November 2022. The New York Stock Exchange, which had fallen nearly 3% the previous day, rebounded slightly. The S&P 500 index rose 0.4%, and the tech-heavy Nasdaq Composite index climbed 0.3%, recovering part of the previous day's 3.6% plunge. However, Tesla fell 2% following an 8% drop.

The 'Magnificent Seven (M7)' all rose. M7 refers to the seven major tech stocks in the U.S. stock market, including Apple, Amazon, Alphabet (Google's parent company), Meta, Microsoft, Nvidia, and Tesla. However, Tesla, which had been affected by the close relationship between CEO Elon Musk and President-elect Trump, remained sluggish.

The Fed's hawkish stance also impacted European and Asian markets. Europe's Stoxx 600 index fell 1.5%, and the UK's FTSE 100 index dropped 1.1%. In Asian markets, stock exchanges in Japan, Korea, and Hong Kong all closed lower. Emerging markets were also hit. The MSCI Emerging Markets Index fell 1.2%, showing weakened investor sentiment.

On Wall Street, there is advice to prepare for the possibility of the Fed's tightening stance continuing. Jeff Weniger, head of equity strategy at WisdomTree, analyzed, "Recently, the market has been focused on President-elect Trump, but now Jerome Powell, the Fed Chair, is back in the spotlight."

Hyein Lee, reporter hey@hankyung.com