US 2-year bond yields jumped up to their highest level since March last year following the US Federal Reserve meeting last week.
The move reflects the market pricing in higher official interest rates in the US within the next two years.
While nine policy officials (half of the committee) expect interest rates will rise next year – up from the seven who said so in June, the majority expect to see three rate rises in 2023.
Chart 14: US 2-year bond yield (%)
How much higher could bond yields go? Reduced bond purchases by the US Federal Reserve shouldn’t surprise the market, so the impact on bond yields should be limited.
Moreover, there appears to be enough demand among banks, investment and pension funds, and foreign central banks to pick up the slack as the Fed reduces its monthly purchases from $80 billion in Treasuries and $40 billion in mortgage-backed securities. Recent Treasury auctions have been met with strong demand
Also note the cost of hedging US bond purchases by foreigners falls as the USD rises. We expect the USD to be in a strengthening trend as stimulus is reduced.
Chart 15: Foreign ownership of the US Treasury market (%)
Bond prices for some of China’s most riskiest debt are falling (yields rising) as contagion risk resulting from the demise of China Evergrande rises.
The yield on the bonds will likely stay elevated in the near term, above the levels reached during the early pandemic panic in March 2020.
Chart 16: Yield on China’s junk bonds (%)