Bond Selloff Cuts Rate-Hike Expectations as Long-Term Yields Rise

Global bond selling is tightening financial conditions for U.S. households and businesses, potentially reducing the need for additional central-bank rate increases even as inflation risks remain.

Interest-rate swaps across eight major economies imply about 539 basis points of cumulative rate-hike expectations, down from a September peak of 717 basis points. The 178-basis-point decline shows investors are assessing whether higher bond yields can deliver enough tightening to reduce the need for further policy action.

Long-term yields have risen for reasons beyond expectations for central-bank policy. The 10-year U.S. Treasury term premium has climbed to about 0.98%, the highest level since 2014, showing that investors are demanding more compensation to hold longer-dated government debt.

Government financing needs, fiscal risks and corporate investment in artificial-intelligence infrastructure are adding to upward pressure on long-term yields. Demand at recent Treasury auctions has improved, but remains insufficient to remove concerns about the growing supply of long-term debt.

Inflation data will help determine whether market-driven tightening can substitute for additional rate increases.

The combination of cooler core inflation and renewed energy-price pressure could leave policymakers balancing weaker demand against persistent price risks. A slowdown in housing, business investment and consumer spending could limit the need for substantially higher policy rates.

If energy-price inflation spreads more broadly, however, tighter bond-market conditions and additional central-bank increases could occur together, adding pressure to economic activity.