Jumping yields, slumping stocks may boost case for a Fed pause

Rising Treasury bond yields and home mortgage rates may reduce support at the U.S. Federal Reserve for additional interest rate increases, the prospect of which have already been ebbing on the basis of weaker inflation.

Rates on a 30-year home mortgage in the U.S. rose to 7.09%, breaching the 7% level for the first time since November and marking a more than 20-year high. The recent climb in yields has been fast enough and surprising enough that “the Fed will be monitoring bond market developments - and the wider fall-out across asset markets - carefully,” said Evercore ISI vice chair Krishna Guha.

For the Fed, the rising yields may help resolve an issue that has preoccupied policymakers in recent months: whether financial markets and the economy had fully adapted to the rate increases it has imposed since last year, or whether there was still a tightening of market-based borrowing costs yet to come.

As of the Fed’s July meeting, most Fed officials said they thought rates would need to increase more, with key measures of inflation still more than double the Fed’s 2% target. But if the rise in yields is sustained, that may show the bond market increasing borrowing costs and slowing the economy on its own, in line with what policymakers have been expecting to happen.

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Jumping yields, slumping stocks may boost case for a Fed pauseRising Treasury bond yields and home mortgage rates may reduce support at the U.S. Federal Reserve for additional interest rate increases, the prospect of which have already been ebbing on the basis of weaker inflation. The Fed raised interest rates at its July meeting by a quarter of a percentage point, to a range of between 5.25% and 5.5%, a widely anticipated move investors have construed as the central bank's last step in an aggressive 16-month rate hike campaign to slow inflation from 40-year highs. But bond yields since then have raced higher, with the interest rate on a 10-year U.S. Treasury security rising from around 3.86% the day of the Fed's July 26 rate decision to as high as 4.32% on Thursday.
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