- The two-year Treasury yield hit its highest level since 2007 on Friday.
- The jump in US bond yields follows another aggressive rate hike by the Fed this week.
- The central bank has signaled that it can stomach an economic downturn if inflation comes down.
The two-year Treasury yield touched its highest level in 15 years on Friday, as aggressive moves by the Federal Reserve send bond yields soaring.
The two-year Treasury, which is highly sensitive to economic policy moves, topped 4.2% in trading on Friday, at one point beating a 15-year high of 4.266%. Those are the highest yields for the short-dated note since the 2007 recession, and signals investors are gearing up for more hawkish moves by the US central bank after this week's 75 basis point increase in the benchmark rate.
Most of the Treasury yield curve was higher Friday morning. The key 10-year note was up about one basis point, to 3.72%. The largest moves were in the shorter-dated part of the curve, with the the three-year note up about five basis points to 4.19% and the five-year rising four basis points to 3.96%.
The Fed' goal is to squash stubborn inflation by tightening monetary policy and keeping rates higher for longer, with further bouts of pain likely for stocks as a result.
But there's a silver lining, which is that investors are expressing a renewed trust in the Fed that it will do what it says. This follows a long period of criticism that chairman Jerome Powell had delivered inconsistent messaging on what it would take to tame inflation.
"The bond market is taking the Fed at its word that short-term interest rates will remain high for several years," Nicholas Colas, the co-founder of DataTrek said in a note on Friday. He noted that market estimates of five-year inflation also trended lower, down to 2.29% from 2.67% in April.
"That reads to us like a vote of confidence that the Fed will be able to reduce inflation, and more importantly, keep it there for the next 5 years," Colas added.
It's good news for the central bank, which has been struggling to regain some lost credibility after getting the inflation narrative wrong throughout 2021 in its insistence that rising prices were a transitory phenomenon. Economists think that's resulted in more aggressive rate hikes than would have been necessary – but failing to get inflation under control now could lead to it getting entrenched in the economy, famed economist Paul Krugman warned.
The Fed will convene for its next policy meeting in November. Messaging this week suggested policymakers would hike rates by another 75-points in November and 50 points in December, taking the policy rate to 4.25-4.5% by year-end.