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U.S. yields hit a 16-year high ahead of the conclusion of the Federal Reserve’s policy meeting on Wednesday, where the central bank is expected to keep interest rates steady but may signal a willingness to keep monetary policy tight for longer.
The benchmark 10-year Treasury yield hit a session high of 4.371 percent, the highest level since early November 2007. The five-year Treasury yield also hit a 16-year high of 4.524 percent, while the two-year Treasury yield also hit a 16-year The note reached a two-month high of 5.114 percent.
Government bond yields, which move inversely to prices, reflect interest rate and inflation expectations. Tuesday’s rise suggested traders expected Fed Chairman Jay Powell to signal the central bank’s willingness to keep interest rates higher for longer.
Although Fed officials have signaled they are concerned about the risks of tightening monetary policy, mixed data from the U.S., including a recent rise in headline inflation, has complicated the central bank’s job. In the Fed’s “dot plot” – its economic and policy forecasts for the coming year – to be released tomorrow, officials may indicate that they expect to keep interest rates high for longer.
“Markets are bracing for a hawkish Fed tomorrow,” said Benjamin Jeffery, U.S. interest rate strategist at BMO Capital Markets.
Markets are pricing in a 99 percent chance that interest rates will remain unchanged on Wednesday, but traders have about a 50-50 chance of rates being raised by the end of the year.
The Bank of Canada’s deputy governor indicated on Tuesday that the central bank was ready to end its recent so-called pause in monetary tightening and “raise the key interest rate,” reflecting the battle central bankers still face to “Continue to curb price pressure if necessary.”
Britain, Switzerland and Japan are among the other countries whose central banks will announce policy decisions this week.
“Inflation has proven to be insidious and central bankers are in a far from easy position,” said Danni Hewson, head of financial analysis at AJ Bell.
“Go too far and they risk destroying their respective economies. If they don’t go far enough, they risk breaking down the door and sending prices soaring.”
The latest U.S. consumer price index data added to concerns that the Fed’s latest efforts to bring inflation back to its 2 percent target could take longer than expected. Rising energy costs caused the consumer price index to rise to 3.7 percent in August, exceeding economists’ forecasts.
A measure of the dollar’s strength against six other currencies fell 0.1 percent.
Elsewhere, Wall Street’s S&P 500 closed 0.2 percent lower, with energy and industrials among the worst-performing sectors on the benchmark. The technology-heavy Nasdaq Composite also fell 0.2 percent.
Oil prices hit session highs before the opening bell in New York on Tuesday and began to fall, with U.S. oil and gas stocks subsequently tracking lower as the regular trading session continued on Wall Street.
Brent crude oil, the international benchmark, extended gains for the fourth straight trading session, rising above $95 for the first time since November. Those early gains evaporated later in the session, sending the price down 0.1 percent to $94.34 a barrel.
West Texas Intermediate, the U.S. equivalent, also hit a 10-month high before slipping 0.3 percent lower to $91.20.
Recent price increases were spurred by news earlier this month that two of the world’s biggest producers, Saudi Arabia and Russia, would extend their supply cuts through the end of the year.
Investors remain concerned that rising oil prices could hamper central banks’ efforts to curb inflation in the U.S. and Europe. This underpins banks’ arguments for keeping interest rates higher for longer, despite signs that global economic growth is slowing.
“The recent rise in oil prices is extremely unhelpful, especially as inflation was already above central banks’ 2 percent targets,” said Dario Perkins, managing director of global macro at TS Lombard. “However, it is important to keep these recent inflation developments in context. We are not yet in danger of undoing 12 months of solid disinflationary progress – not even close.”
Elsewhere, the regional Stoxx Europe 600 index closed less than 0.1 percent lower, with positive moves in real estate, financials and energy stocks offset by declines in healthcare and industrial stocks. London’s FTSE 100 rose 0.1 percent, as did France’s CAC 40.
China’s benchmark CSI 300 index fell 0.2 percent while Japan’s Topix rose 0.1 percent as markets reopened after a holiday.