US Treasury yields rose again this week after the Federal Reserve signalled a higher-for-longer rate regime to get inflation down to its 2% target. Benchmark 10-year Treasury yield gained 11 basis points to 4.44%. Meanwhile, the 2-year Treasury yield ended at 5.11%, the highest level since 2006, up 7 basis points week-over-week.
Even if inflation shows signs of persistence, it has eased while growth remains solid and the job market cools. It’s also worth noting that the effect of interest rate hikes is assessed with several months of lag. Consequently, we can wonder whether the cumulative effects of the Fed’s rate hikes could ultimately tip the U.S. economy into recession, especially if the central bank continues to reduce the amount of assets it holds. It shrank its balance sheet by $75 billion from Sept. 13 to Sept. 20, bringing its size to $8,024 billion. As a result, it pulled $97 billion out of the financial system in September and $527 billion over the year. This is another way to make its monetary policy more restrictive.
In Europe, the yield on the German 10-year Bund rose from 2.68% to 2.74% while the yield on the French 10-year OAT also gained 6 basis points from 3.22% to 3.28%.
Against this backdrop, the IBOXX € Liquid Corporates index fell 0.32%. In the US, the IBOXX $ Domestic Corporates index slid 0.60%.
High yield bonds edged down 0.21% in Europe (IBOXX € Liquid High Yield Index), snapping a four-week winning streak. The asset class lost 0.60% in the US (Markit iBoxx USD Liquid High Yield Capped Index). Lastly, emerging debt in local currencies slipped 0.78% amid a strong greenback.