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10-year government interest rate reaches 3% for the first time since 2018




The worst bond route in decades reached a new milestone on Monday, with the return on the 10-year treasury reaching 3% for the first time since the end of 2018.

The yield on the 10-year government bond benchmark index, which rises as bond prices fall, rose at the start of trading in the US, reaching as high as 3.008% in the afternoon, as traders prepared for the outcome of this week’s Federal Reserve meeting. It then fell below 3% to settle at 2.995%, according to Tradeweb,

up from 2.885% on Friday.

A reference for borrowing costs on everything from mortgages to student loans, the yield last closed above 3% in November 2018 and has jumped from 1.496% at the end of last year.

The prices of government bonds, corporate bonds and municipal debt have fallen this year in response to the Fed̵[ads1]7;s measures to raise interest rates in an attempt to curb inflation. The Bloomberg US Aggregate bond index – mainly US government bonds, high-rated corporate bonds and mortgage-backed securities – returned minus 9.5% this year as of April 29.

“There have been a couple of pretty bruises,” said Nick Hayes, head of total return and bond allocation at AXA Investment Managers.

Treasury yields to a large extent reflect investors’ expectations of short-term interest rates over the life of a bond. Rising interest rates are often associated with a strengthening economy because faster growth and a tighter labor market can cause central banks to crack down on inflation.

In this case, the labor market is extremely tight and inflation is moving at its fastest pace in decades, prompting the Fed to signal a rapid series of rate hikes and trigger a sharp rise in interest rates that has sent shockwaves through the markets.

Investors are unlikely to get much relief before inflation worries subside, a wildcard when Covid-19 outbreaks in Asia push global supply chains and the war in Ukraine drives up commodity prices, said Zachary Griffiths, senior macro strategist at Wells Fargo.

“There’s a lot of uncertainty about inflation, monetary policy, geopolitics,” Mr. Griffiths said. “Although the Fed has signaled that it will tighten significantly, it has not really seemed to bring down inflation expectations yet, not lasting.”

An inversion of the US Treasury yield curve has been seen as a warning sign of recession for decades, and it looks like it is about to light up again. WSJ’s Dion Rabouin explains why an inverted yield curve can be so reliable in predicting recession and why market watchers are talking about it now. Illustration: Ryan Trefes

Fed officials raised interest rates by a quarter of a percentage point in March. The Fed’s latest meeting minutes suggest that the central bank may raise interest rates by half a percentage point on Wednesday and begin reducing its asset portfolio of $ 9 trillion. It may have surprised some in the market who expected a less aggressive pace, said Mr. Griffiths.

Ten-year government interest rates were well above 3% for most of the last half century, exceeding 15% in the 1980s, according to Ryan ALM & Tradeweb ICE. But in the last decade, they have ended the day above 3% only 64 times, reflecting a period that until recently was characterized by weak growth and inflation.

While current bond yields remain low by historical standards, they still represent a remarkable turnaround from the first days of the Covid-19 pandemic, when the 10-year yield fell as low as 0.5%.

Investors then saw little reason to worry about interest rate increases. Not only was the economy in a precarious position, Fed officials reconsidered the way they conducted monetary policy, and promised to be more cautious about raising interest rates after many years in which inflation had largely remained below their 2% annual target.

Crops began to rise at the end of 2020 in response to the development of effective Covid-19 vaccines and received another boost when Democrats won full control of Congress, laying the groundwork for more fiscal stimulus.

Nevertheless, the 10-year interest rate peaked at around 1.75% early last year, spending much of 2021 on a gradual decline even as inflation began to rise. Assured by Fed officials that inflation was largely temporary, investors as late as December expected only a few quarter percentage point rate hikes in 2022.

Since then, however, bonds have been beaten, as inflation has remained stubbornly high and analysts have continued to raise expectations of interest rate hikes – raising the bar every time the Treasury has priced in the most aggressive previous forecasts.

As it looks, interest rate derivatives show that investors expect the Fed to raise its reference rate for federal funds from the current level between 0.25% and 0.5% to just over 3% next year.

This suggests a long journey ahead, where much of the economy could go wrong, including a further decline in more risky assets such as equities, leading the Fed to halt austerity. The jump in returns has already led to sharply higher borrowing costs for consumers – with 30-year mortgage rates climbing above 5% – and contributed to stock declines that have sent the S&P 500 down around 13% compared to the year.

Nevertheless, many analysts believe that the Fed-fund interest rate may have to climb well above 3% to curb inflation, suggesting that bond sales may still have room to run.

One point of such analysts is that inflation expectations over the next decade are still high, even with the expected tightening from the Fed. This means that so-called real, or inflation-adjusted, government interest rates remain low even by recent historical standards, which could potentially provide an incentive for companies to borrow and invest despite the sharp rise in nominal interest rates.

The interest rate on the 10-year inflation-protected government bond – a proxy for real interest rates – was around 0.16% on Monday afternoon, according to Tradeweb. It was up from minus 1.11% at the end of last year, but still well below the almost 1.2% level they reached at the end of 2018.

Write to Sam Goldfarb at sam.goldfarb@wsj.com and Heather Gillers at heather.gillers@wsj.com

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