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US 10-year bond yields reach 16-year high at 4.80%

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2023-10-04

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On Tuesday, US 10-year bond yields surged to 4.80%, marking a new 16-year high. Investors, both large and small, were gripped by worry over rising interest rates, increasing inflation, and Federal Reserve actions, according to market reports.

The 30-year Treasury yield also climbed to 4.932%, its highest level since 2007. Meanwhile, the 2-year T bond, sensitive to Federal Reserve rate-setting expectations, inched up to 5.15%.

Despite a 45-day extension of US government funding just before the October 1 deadline, many market commentaries noted ongoing instability, particularly on Tuesday.

The surge in yields and the US dollar's appreciation to yearly highs against some currencies (e.g., the Australian dollar, which briefly surpassed 63 US cents at 7 a.m. Sydney time) were attributed to the latest US job opening figures for August (known as JOLTS). These figures unexpectedly showed a significant increase, causing unease in the market. Yields rose as investors speculated that this data might compel the Fed to raise rates at its November meeting. However, economists suggested that the rise might be a one-time anomaly, with other data points indicating a cooling labor market.

In addition to the lower market performance, the ongoing instability in Washington played a significant role. Hard-right Republican members of the House of Representatives sought to oust their party's leader (the Speaker). A vote on the position of Speaker Kevin McCarthy was scheduled in the House. If he is defeated, the Republicans would be leaderless, exacerbating the instability. Observers speculated that Democrats in the lower house might support McCarthy and vote against the coup attempt to mitigate the situation.

If the Speaker's removal succeeds, it raises the possibility of weeks of escalating instability between the hard-right Trump supporters, the rest of the Republican party, the Democrat-controlled Senate, and the White House, jeopardising hopes for a sustainable funding deal in 42 days (following the last-minute weekend extension of government funding for 45 days).

With previous downgrades from S&P Global in 2011 and Fitch in August of this year, America faces the risk of losing its final AAA rating from Moody's if Republicans opt for further instability, as Moody's has warned that it would downgrade the rating if the funding crisis becomes prolonged.

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