Key facts
- The Federal Reserve's upcoming monetary policy meeting is a critical juncture for the bond market.
- Markets widely expect the Fed to raise its benchmark interest rate by a quarter point.
- A decision to hold rates steady could accelerate the bond market sell-off and question the Fed's inflation-fighting credibility.
- The 10-year Treasury yield reached its highest level in 19 years, surpassing 5.04% intraday and closing around 5%.
The Federal Reserve's upcoming monetary policy meeting is poised to test its credibility with bond investors as Treasury yields have surged to multi-year highs. Traders are pricing in a 92% chance that the central bank will raise its benchmark interest rate for the first time since 2023.
If the Fed surprises markets by holding rates steady, analysts warn it could accelerate the ongoing bond market sell-off, pushing yields even higher and increasing borrowing costs for consumers, businesses, and the U.S. government. The 10-year Treasury yield has been particularly sensitive, hitting its highest level in 19 years and surpassing 5.04% during trading on Tuesday, closing around 5% – its highest since 2007.
Recent data showing sticky consumer inflation in August has solidified expectations for a rate hike. However, if the Fed fails to convince investors of its commitment to controlling inflation, it could further rattle markets. Vail Hartman, US rates strategist at BMO Capital Markets, noted that deviating from a highly priced decision would erode the Fed's inflation-fighting credibility and could trigger sharp movements across the yield curve, the dollar, and risk assets.