U.S. Treasury yields across the entire curve are pushing to new highs as traders prepare for a longer stretch of tighter monetary policy. CME FedWatch puts the 4.75% to 5% federal funds range as the likely outcome for June 2027.
That would mean four quarter-point hikes from today’s 3.75% to 4% range. Meanwhile, the Federal Reserve has already raised the fed funds rate by 25 bps this month.
The pressure is across the entire Treasury market. The 20-year yield is approaching 5.5%, which has sent the long-bond ETF (TLT), to all-time lows below $80.
While the 10-year yield is above 5.1%, levels last seen in 2007. Borrowing costs are rising beyond the U.S. too, with government bond yields under pressure in France, Germany, the U.K. and Japan.
Higher yields and a stronger dollar are weighing on risk assets. The dollar index has climbed above 101, up 3% this year. While, bitcoin has fallen below $83,000, from its local high of $87,500 and gold remains just above $4,200, down 25% from its January all-time high.
Several factors are pushing U.S. Treasury yields higher. The economy remains strong: the S&P Global composite PMI, which covers manufacturing and services, exceeded expectations in September, rising almost 4.3% to 58.4.
Middle East tensions have also made the inflation outlook less certain, which has contributed to oil and diesel prices rising.
While heavy borrowing to fund AI infrastructure is adding to the supply of bonds competing with Treasuries for investors. Together, stronger growth, inflation risk and greater demand for capital are putting upward pressure on yields.
The Japanese yen continues to weaken against the U.S. dollar which is now back at 159 yen. That reverses much of the currency’s recovery from around 153 following the reported U.S. and Japanese intervention last month.
The question is whether the prospect of further Fed hikes will keep lifting yields and the dollar.