The surge in 10-year US benchmark yield at near 5 percent has rattled global markets, as fears of tight monetary conditions weigh on sentiment. Federal Reserve Chairman Jerome Powell's speech to the Economic Club of New York seemed to help a bit as he acknowledged the progress made in recent months in bringing inflation down.
Powell, however, gave no clear indication of the path the Fed will take, except for reiterating his commitment to bring inflation down to 2 percent.
He said that the economy and the labour market will need to slow down to give inflation the room to cool off to 2 percent. The comments stoked fears among investors that the Fed could possible go for another hike even though most are leaning towards an extended pause.
The yields touched a 16-year high and rippled through currency markets with the US dollar index reaching 106.34. The high yields will put pressure on valuations in emerging market assets.
Also read: Emerging Market losses deepen as treasury yields edge towards 5%
“Being the benchmark rate for any investment, higher US Treasury yield increases the return expected for any other investment, either equities, real estate, or bonds,” a Bloomberg report quoted Omar Ghalloudi, head of emerging-market trading at KNG Securities, as saying. “Meeting these higher returns requires asset prices to adjust downward.”
A higher spending on account of higher spending due to one more war erupting in the Middle East, US economic resilience, concerns about the increase in US debt issuance, and interest rates remaining high for longer could keep the yields high.
"Now we're talking about not just the Ukraine-Russia conflict... Now you have another front, that's in the Middle East... That has to be satisfied... The US is going to need more and more supply in terms of what we auction to pay for all of this," a Reuters report quoted Quincy Krosby, chief global strategist at LPL Financial, as saying.
Also read: Wall Street drops as Treasury yields surge, Jerome Powell speaks
The silverlining is that higher yields could make the job of Fed easier in sustaining higher interest rates and not opting for a rate hike.
"While the market is anticipating one more rate hike, I believe the Fed can choose to stay the course and keep rates higher for a more extended duration," Dean Kim, head of global research product at William O'Neil + Co said in a chat with CNBC-TV18.
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