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Fed tightens rates

September 2018

US Treasury bond yields increased as investors awaited the next development in the trade war between the US and China. The yield on the ten-year Treasury bond rose as high as 3.1%, before subsiding as each side implemented its latest round of trade tariffs. In the longer term, higher levies are likely to drive up prices, and this could dampen investors’ appetite for government bonds.

  • US interest rates rose by 0.25 percentage points
  • Inflation is picking up in the eurozone
  • Italy’s budget plans rattle investors

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US Treasury bond yields increased as investors awaited the next development in the trade war between the US and China. The yield on the ten-year Treasury bond rose as high as 3.1%, before subsiding as each side implemented its latest round of trade tariffs. In the longer term, higher levies are likely to drive up prices, and this could dampen investors’ appetite for government bonds.

“US interest rates rose for the third time this year”

US interest rates rose for the third time this year and the eighth time since the Federal Reserve (Fed) began tightening in 2015. Fed officials voted unanimously to increase the key federal funds rate by 25 basis points to a range of 2% to 2.25%, and a further increase is widely expected before the end of the year.  Fed Chair Jay Powell described the ongoing upward trajectory as a “gradual return to normal” ; the Fed also removed the word “accommodative” from its statement when describing its monetary policy stance. The benchmark US Treasury Bond yield rose from 2.86% to 3.06% over September. 

European bond yields rose as European Central Bank (ECB) President Mario Draghi hailed a “relatively vigorous pick-up in inflation” alongside signs of rising wage pressures. Ten-year French and German government bond yields reached their highest level since the middle of June, while the shorter-dated two-year German government bond yield rose to a height last seen in March. Over September as a whole, the yield on the German ten-year government bond climbed from 0.23% to 0.46%, while the ten-year French government bond yield increased from 0.63% to 0.79%. 

Italy continued to ruffle feathers during September following the unveiling of a controversial budget. The government plans to increase its public spending, setting a budget deficit of 2.4% of GDP and setting the country’s budget policy on collision course with the rest of Europe. The benchmark Italian government bond yield declined from 3.18% to 2.79% over September, but jumped sharply following the budget announcement.


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