The 10-year Treasury yield climbed to its highest level since 2007 on Tuesday, and S&P 500 futures slipped as traders priced in a Federal Reserve rate hike. A tightening link between oil prices and bond yields could add further upward pressure on those yields ahead of the Fed's decision.
The 10-year Treasury yield jumped more than six basis points to 5.025% on Tuesday, its highest level since 2007. The move came as investors continued selling government debt following a fresh surge in oil prices and mounting bets on a Fed rate increase.
Equity futures slip as yields climb
Futures tracking the S&P 500 and Nasdaq 100 dropped 0.2%, while contracts on the Stoxx Europe 600 edged 0.1% lower. In Asia, South Korea's Kospi slipped 1.1% and Hong Kong's Hang Seng shed 0.6%.
Strategists said US borrowing costs would need to climb further before triggering a bigger equity selloff. Frank Benzimra, head of Asia equity strategy at Société Générale, said stocks would need materially higher rates to feel real pressure, according to the Financial Times.
Fed rate-hike bet builds
The 10-year yield briefly crossed 5% on Monday before easing slightly. The 30-year Treasury yield rose over five basis points to 5.384%. The move comes ahead of the Federal Reserve's two-day policy meeting that began Tuesday, with markets pricing in higher odds of a rate hike after August inflation remained well above the central bank's 2% target.
Traders are pricing in a more than 92% chance the Fed will raise rates by 25 basis points at the meeting, according to the CME FedWatch tool.
Oil-yield link tightens
The correlation between oil and Treasury yields has grown unusually tight. According to CNBC: "Speaking simplistically, higher oil prices lead to higher inflation expectations and vice versa," said Steve Sosnick, chief strategist at Interactive Brokers. The one-month rolling correlation between front-month WTI crude and the 10-year Treasury yield has climbed to 0.96, according to BMO Capital Markets.
Brent crude, the international benchmark, rose 1.6% to $107.3 in Asian trade, adding to the inflation pressure feeding into the bond selloff. As long as oil prices stay firm, Sosnick said, that pressure on rates is likely to continue.
Sources: CNBC, Financial Times
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