Two-year US Treasury Yield Tops 5% For the First Time Since 2007

The yield on the two-year US treasury note hit 5% this week, its highest level since 2007. Investors are assessing Federal Reserve Chairman Jerome Powell’s comments, who admitted the central bank may be forced to increase the speed of interest rate hikes again.

The two-year treasury yield was trading more than 12 basis points higher at 5.015% in this week’s trading. Meanwhile, the yield on the benchmark 10-year treasury yield briefly passed the key 4% level at one point during trading.

Bond yields and prices have an inverse relationship. When the cost of borrowing money and the scale of yields rise in tandem, bond prices usually fall.

In his latest remarks, Fed Chair Powell said, “The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated.”

Many investors are preparing for an upcoming rate hike that is possibly larger than the most recent 25-basis-point increase. Both wholesale and consumer inflation increased for January, as did January’s personal consumption expenditures price index reading. The Fed watches each of these measures closely.

While some market participants may have been caught off guard by Powell’s comments, the reality is that he affirmed what the bond market had already priced in. Bond investors have been left with conflicting information to decipher, not just because of the influence of considerable economic fluidity, but also because of the overlay of monetary-policy-induced volatility.