US Fed rate hike impact on American Treasuries: The US Federal Reserve, as widely expected, increased interest rates by 25 basis points on Wednesday, 16 September, and signalled that one more rate hike could come this year.
The Federal Open Market Committee (FOMC) unanimously voted for a rate hike. Fed Chairman attributed the rate hikes to a strong US economy- especially the resilient labour market-, elevated inflation, and geopolitical uncertainties.
The US Central Bank has held US Fed rates steady since January 2026. It is the first US Fed rate hike since 2023.
“Hawkish overtones are throughout the latest summary of economic projections. Given the current economic circumstances, the committee delivered what was needed, and markets are handling it remarkably well. Going forward, the inflation debate will likely centre on the magnitude of improvement as geopolitical conflicts wane,” Jeffrey Roach, Chief Economist for LPL Financial, noted.
After the Fed’s policy decision, American Treasury yields pared their decline. 10-year bond yields were 3 bps lower at 5.02% around 12:55 AM IST on 17 September, while 30-year bond yields were 1 bps lower at 5.35%. Two-year yields, which are the most sensitive to the central bank’s monetary policy, erased losses and rose 7 bps to 4.73%.
The Fed’s policy decision did not trigger a sharp sell-off in US bond markets, as a 25 bps rate hike was widely expected. However, yields may remain elevated due to the possibility of one more rate hike this year, as inflation (PCE index) has been above the Fed’s 2% target for more than 5 years and may remain at higher levels, given that oil prices are up due to the US-Iran conflict.
Inflation concerns rattle US Treasuries
The US bond market has been rattled by inflation concerns amid surging energy prices driven by the Middle East conflict.
On 15 September, US 10-year Treasury yields jumped to 5.04%, their highest level since 2007, fuelled by mounting inflation concerns amid rising energy prices.
As the Fed is expected to lift rates at least one more time this year, followed by a pause in 2027, the bond market is likely to see some pressure going ahead.
Sunny Trisal, Portfolio Manager at Investvalue Capital, explained that a Fed rate hike could strengthen the dollar and lift the bond yields.
According to Trisal, higher yields may cause short-term mark-to-market volatility for debt investors, particularly in longer-duration bonds. At the same time, a repricing of yields may offer better entry points in high-quality short- to medium-duration debt for investors with an appropriate investment horizon.
Higher US yields make dollar assets relatively more attractive and could weigh on foreign portfolio flows into both Indian equities and bonds.
A sustained rise in global yields and oil prices could also complicate the domestic monetary policy outlook.
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