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Major central banks have warned they will only gradually lower borrowing costs in 2025 after inflation proved firmer than expected, a change affecting bond markets on both sides of the Atlantic. There is.
The yield on the 10-year U.S. Treasury, the bedrock of global finance, hit 4.59%, the highest level since May, a day after Federal Reserve officials scaled back their expectations for rate cuts. Yields rose 0.2 percentage points in the past two days alone as investors scrambled to reassess their expectations for Fed policy over the next 12 months.
Long-term yields on U.S. Treasury bonds are inversely proportional to their prices and typically rise in response to interest rates and inflation expectations.
UK yields also hit 4.66%, the highest level in more than a year, after Bank of England officials warned of a growing risk of “persistent inflation” on Thursday and left the benchmark interest rate unchanged.
Inflation is starting to pick up again in both the US and UK, while uncertainty surrounding US President-elect Donald Trump’s policies clouds the economic outlook around the world.
Andrew Pease, chief investment strategist at Russell Investments, said investors were concerned that going forward “the pace of[monetary policy]easing will slow significantly until inflation falls” and that central banks’ He described the “last mile challenge” in the mitigation struggle. Keep prices under control.
Concerns that persistent inflation will slow the pace of rate cuts, combined with worries that loose fiscal policy will make the problem worse, have sent bond markets in the United States and Britain lower in recent weeks.
U.S. stocks also fell on Wednesday after the Federal Reserve cut interest rates, but predicted that the cut in 2025 would be smaller than previously expected. There was some improvement on Thursday.
The cautious rhetoric from US and UK rate-setters contrasted with the message from the European Central Bank, which last week insisted that the “darkest days” of inflation were over, paving the way for new interest rate cuts. Ta.
Investors have dialed back hopes for policy easing in recent weeks. Traders are pricing in two quarter-point rate cuts, up from the four quarter-point cuts the central bank had priced in next October. Two rate cuts were expected a month ago, and there is now a 50/50 probability that the Fed will cut rates next year.
Fed officials said that even if they cut rates by a quarter of a percentage point, they expect the rate cut next year to be only 0.5 percentage point, compared to their forecast three months ago of 1 percentage point. Economists said the central bank’s caution was partly due to President Trump’s potential inflationary policies, pointing to the possibility of tax cuts, tariff hikes and mass deportations.
Stronger-than-expected U.S. inflation data for September and October have intensified calls for caution. Fed officials on Wednesday raised their 2025 inflation outlook to reflect those concerns.
The central bank kept its key interest rate unchanged at 4.75% on Thursday, with a majority of officials pointing to the risk of higher inflation, even though it expects zero growth in the final quarter of the year.
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The BoE said trade policy uncertainty had increased “substantially” over Trump’s tariff plans, but stressed that the impact on UK inflation was not clear for some time.
Three members of the nine-member Monetary Policy Committee called for an immediate rate cut, but the majority supported keeping interest rates unchanged given the increased risk of sustained inflation.
“Due to heightened economic uncertainty, we cannot commit to the timing or magnitude of any interest rate cuts next year,” Bank of England Governor Andrew Bailey said in a statement.
