Interest rate markets are in turmoil: US long-term government bond interest rates rose to 2007 levels

The interest rate market is digesting the Fed’s Wednesday interest rate decision on Thursday. The yield on the 30-year US Treasury note has remained near its highest level since 2007, as comments by Fed Chairman Kevin Warsh left investors uncertain about the future development of interest rates.

The Fed decided on Wednesday, as expected, to keep its target interest rate in a range of 3.50–3.75 percent.

The decision was made by a vote of 9–3. Beth Hammack, Neel Kashkari and Lorie Logan disagreed with the majority, who would have liked to raise the target range of the interest rate by a quarter of a percentage point.

“These three members all represent the Fed’s so-called hawkish camp. They have been in favor of a tighter monetary policy for a long time, so this cannot be considered a big surprise in itself,” Danske Bank senior analyst Antti Ilvonen estimated earlier this morning in Kauppalehti’s Talousaaamu.

Instead, Fed Chairman Warsh voted to keep interest rates at current levels, even though he has previously pushed for rate cuts to support economic growth.

Markets are currently expecting the central bank to raise rates once this year.

U.S. Treasury yields were roughly flat on Thursday. The widely-watched 10-year Treasury yield was nearly unchanged from the previous trading day at 4.677 percent. The country’s two-year yield was down two basis points at 4.251 percent and the 30-year yield was up about one basis point at 5.217 percent.

Earlier Wednesday evening, the 30-year yield rose to its highest level since 2007, as the Fed’s messages failed to confirm expectations of near-term rate cuts.

Across the Atlantic, in Europe, the German 10-year government bond yield rose by two basis points, the British by three basis points and the French by one basis point.

Economic growth weaker than expected

Fresh figures on the US economy were also released on Wednesday. The country’s economy grew more slowly than expected in the second quarter, although consumer spending recovered and business investment remained strong.

According to the preliminary estimate, US gross domestic product grew by 1.5 percent in the second quarter of the year. The market had expected growth of 2.0 percent. Economic growth was overshadowed by a weakening in net exports, which can vary significantly from quarter to quarter.

The Bank of England decided earlier in the day to keep its key interest rate unchanged at 3.75 percent, as expected. The central bank last changed its interest rate in December last year, when it lowered its key interest rate from 4.00 percent to the current level.

The latest official figures show that UK inflation was 2.6% year-on-year in June. The rate of inflation fell slightly from the previous month but remains above the central bank’s 2% target.

However, the central bank warned that a potential escalation of the Iran war could push inflation above 4% next year, adding to the cost of living pressures for households.

Oil prices were slightly lower on Thursday. Brent crude was down 1% at $90 a barrel.

In the foreign exchange market, one euro was worth $1.1473, 186.95 yen, 0.8580 pounds and 11,000 Swedish kronor at the time of writing. One dollar was worth 162.95 yen and 0.7479 pounds.