Special US bond yields
The 10-year Treasury bond yield, which serves as a benchmark for mortgage rates and a measure of investor confidence, rose yesterday, Tuesday, to its highest level since 2007, which would have a broad impact on markets, including gold prices and financial markets. It is an indicator for the US Federal Reserve to make its next decisions regarding interest rates, after setting them at the last meeting.
The 10-year Treasury yield rose 11 basis points to 4.793, after rising 4.8 percent earlier on Tuesday. While the yield on 30-year Treasury bonds rose to 4.924 percent, which is also the highest level since 2007.
According to a CNBC report:
Uncertainty in the market regarding when and whether the rate increase (interest) can be implemented remains, while there are still two Fed meetings this year (..). The rise in revenues came even though US lawmakers managed to avoid a government shutdown when they passed a last-minute spending bill on Saturday night. This gave them time to finalize the necessary government funding legislation. The closure could have negatively affected the credit rating of the United States as well as the country’s economy. The increase in interest rates has revived talk of market “bond vigilantes,” a term coined by economist Ed Yardeni to describe the effect when fixed-income investors leave the market due to concerns about US debt. The concern is that the spiraling federal budget deficit will create more supply of bonds than demand can satisfy, requiring higher yields to clear the market.
The US Congress approved a temporary funding bill late on Saturday, with overwhelming support from Democrats, after Republican Speaker of the House of Representatives Kevin McCarthy abandoned a previous demand from hard-liners in his party to pass any bill solely through Republican votes (which later cost him his position in a historic precedent). ). The Democratic-majority Senate voted 88 to nine to pass the measure to avoid the fourth partial shutdown of the federal government in a decade.
Fed policy
The CEO of Virgin International Markets (VI Markets), Ahmed Moati, said in exclusive statements to the “Eqtisad Sky News Arabia” website that the rise in 10-year and two-year bond yields, by about 5 percent, came in parallel with the speech of US Federal Reserve Chairman Jerome Powell, in which he stressed During which, inflationary pressures still exist, and therefore “we are continuing to tighten monetary policy” and with signals associated with the Federal Reserve’s direction to raise interest rates again during 2023 at one of the next two meetings in November and December.
Moati pointed to Powell’s statements, during which he warned of the impact of rising oil prices above $90 per barrel on increasing inflationary pressures, in a way that supports the Fed’s directions in this context, and in light of the signals received from approximately 12 members of the bank who confirmed the same speech.
The CEO of Virgin International Markets continued: “All of this ultimately leads to a liquidity trend for bonds, given that it is more reassuring for investors, and with companies fearing a recession, and thus starting to withdraw stocks, which was reflected in Standard & Poor’s and the Nasdaq finally declined, in… Liquidity continued to be withdrawn into treasury bonds…which is very logical, with the fear of a possible recession and the Federal Reserve continuing to tighten monetary policy.”
Tuesday, the Dow Jones Industrial Average lost 454 points (1.3 percent), its largest decline since March during the Silicon Valley crash. The Standard & Poor’s 500 also fell by 1.4 percent, and the Nasdaq also fell by 2 percent. European stocks continued to lose on Tuesday, amid pressure from rising US Treasury bond yields and the dollar on high-risk assets such as stocks and commodities, while pessimistic expectations from the financial intermediation sector affected retail fashion companies.
Moati pointed to the repercussions of this rise on stock prices, as well as gold, explaining that “the rises there and the declines here are all factors that come from the fear of entering into a state of stagflation, in which inflationary pressures rise as growth declines.”
Gold sales continued on Tuesday and the longest series of losses since August 2022 was recorded in the last session, after Federal Reserve (US Central Bank) officials confirmed the possibility of interest rates remaining high.
It should be noted that policymakers at the US Federal Reserve indicated disagreement on whether there is a need to raise interest rates again before the end of the year, but they agree that interest rates must remain high for a long period of time.
The central bank’s Federal Open Market Committee is using interest rate increases to reduce inflation, which officials consider too high even though the rate has fallen significantly from its peak in mid-2022.
Inflation rates
Financial markets expert, Hossam Al-Ghayesh, said in exclusive statements to the “Eqtisad Sky News Arabia” website that although the US Federal Reserve did not raise interest rates at its last meeting, inflation rates are still high, albeit at a slower pace (while still below the rate). The target is 2 percent, which opens the door for central banks to further raise interest rates.
He pointed out that the continuation of this trend would contribute to the continued directing of investments from the most risky countries to the less risky markets, which would benefit from US Treasury bonds, which carry a lower degree of risk and are very highly insured, and thus liquidity rushes to them, especially non-investments. Directly through investment funds and financial institutions.
The financial markets expert monitored the impact of the rise in Treasury bond yields, especially long-term ones, on gold prices and stock markets, as well as the indicators they carry that will help the US Federal Reserve in its next decision regarding interest rates, as follows:
The rise in Treasury bond yields affects the stock market, as liquidity withdraws from this market to bonds, as a means of generating guaranteed returns. We cannot be completely certain that the effects are significant, as they are in all cases related to the degree of geopolitical risks resulting from the developments the world is witnessing, and the extent of their development. If the degree of risk is high, there will be a greater withdrawal of liquidity from money markets towards Treasury bonds. As for gold prices, they are more linked to hedging operations, and to the same degree of connection mentioned to the geopolitical risks that affect many regions around the world, and push investment funds, financial institutions, and countries to hedge.
He stated that this is one of the indicators that the US Federal Reserve takes when making its next decision, especially since the rise in bond yields means that there is a large demand for them, especially long-term for ten years, stressing that the continuation of the inflationary wave determines the fate of these trends, as the Federal Reserve can raise Interest if inflationary pressures escalate or it is ignored (in terms of stabilization) if the rise in inflation rates is limited.
The annual inflation rate in America accelerated last August, more than expected due to increases in fuel prices, which puts pressure on the US Federal Reserve to end the wave of monetary tightening. Data from the US Department of Labor showed that the consumer price index rose during August, at the largest pace in 14 months, recording 3.7 percent on an annual basis, compared to 3.2 percent in July.
Job opportunities in the United States increased unexpectedly in August, which may prompt the US Federal Reserve to raise interest rates next month.
The Ministry of Labor said in its monthly survey on job opportunities and labor turnover on Tuesday that job opportunities or job vacancies, which are a measure of labor demand, jumped by 690,000 to 9.610 million on the last day of August. July data was revised upward to show the presence of 8.920 million job opportunities instead of 8.827 million in the previous reading.
Raising interest
In this context, financial markets expert, Hanan Ramses, in her interview with the “Eqtisad Sky News Arabia” website, pointed to the effects of the crisis of raising the American debt ceiling, the problems occurring between Congress and the Treasury, and the government closure file, among the most prominent factors that impose themselves on the economic scene in the United States in the coming months. The current period, along with the policies followed by the Federal Reserve, which has recently tended to maintain interest rates, but Jerome Powell, the head of the bank, hinted at the direction of further raising, even if at small rates, in order to reduce inflation.
It should be noted here that the constantly high fiscal deficit is one of the factors leading to higher borrowing costs. While public debt rose to more than $32.3 trillion this year. Debt has risen to nearly 120 percent of GDP.
She added: “The interest rate increase came to increase the strength of the dollar against the basket of currencies. The US currency has recently achieved gains for four consecutive weeks, in light of the rise in the yield on 10-year Treasury bills in light of the consequences of that strict policy.”
She believed that a rise in Treasury bill yields in this way would reflect negatively on financial markets and gold prices, especially since the yellow metal usually goes against interest rates and the strength of the dollar.
She said that with regard to financial markets, they – with high yields on treasury bills – are usually wary of that type of monetary policy followed, because it leads to an increase in the cost of investment, and leads to the withdrawal of traders in the financial markets and the tendency to save or invest in treasury bonds.
She stated that the effects of these policies, with the rise in treasury bill yields, would cause impacts that go beyond the borders of the United States, reaching the global economy, especially countries that are not tied to the dollar, at a time when central banks are forced to contain these challenges by further raising interest rates in the country. An attempt to find investment attractiveness for its bonds (..).
She added: “The magnitude of the effects varies from one country to another and from one financial market to another depending on the strength of its connection to the US dollar.”
The US Federal Reserve was in line with most expectations at its last meeting, and kept interest rates unchanged. The bank said in a statement that the Federal Open Market Committee’s decision to keep the key lending rate between 5.25 percent and 5.50 percent gives officials time to “evaluate additional information and its implications for monetary policy.”
The Fed’s expectations showed that interest rates may remain high for a longer period in order to reduce inflation to the specified target. While its expectations for interest rates this year were set at 5.6 percent, it raised them for next year to 5.1 percent compared to 4.6 percent in previous expectations, and the same will be the case in 2025. He raised his interest rate expectations to 3.9 percent, compared to 3.4 percent in the previous forecast.
Economist: The Fed is still far from lowering interest rates
2023-10-04 10:28:12
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