U.S. government bonds reach peak amid tight austerity measures

Interest rates for U.S. government bonds are continuously rising, driven higher by investors’ projection that the U.S. key interest rate will spike to five percent by next May. The U.S. dollar is likely to continue to rise in value as well.

As of Thursday (local time), U.S. benchmark 10-year Treasury yields, which serve as a yardstick for major markets such as home-backed loans, were above 4.2 percent for the first since the 2008 Global Financial Crisis. At midnight on Friday, they had risen to 4.265 percent. They are up more than 2.6 percent from January. The 10-year Treasury yields have shown the first upward trend for the past 12 weeks in 38 years since 1984.

Behind the constant increase in Treasury yields lies the market’s expectation that the U.S. Federal Reserve will keep increasing its key interest rates. The futures market opened on Thursday with investors projecting the U.S. key interest rate at 5 percent next May, meaning that the current rates of 3 to 3.25 percent will go up by around two percentage points.

Added to this, "hawkish" remarks by the president of the Federal Reserve Bank of Philadelphia, Patrick Timothy Harker, contributed further to the increase in Treasury yields. "Given our frankly disappointing lack of progress on curtailing inflation, I expect we will be well above four percent by the end of the year," he commented, adding that inflation will possibly decrease to the Fed’s target of 2 percent or so by the end of 2024.

Furthermore, as the overheated labor market saw a decrease of 12,000 first-time jobless claims last week from Oct. 9 to 15 compared to the previous week, according to the U.S. Labor Department, it seems highly likely that the Fed will keep stringent austerity policies in force. As a result, there is a growing likelihood that the Fed will raise key interest rates by as much as 0.75 percentage points in November.


Hyoun-Soo Kim kimhs@donga.com