Inflation may accelerate, further employment growth for US workers and speculation that the Federal Reserve may raise interest rates four times this year helped boost returns to a nearly seven-year high of 3.109% on May 17 to raise. Yields rise with falling bond prices. Yesterday's returns fell to 2.847% as investors focused on threatening global economic growth through rising trade tensions between the US and its major trading partners. Tariffs proposed by the President
Imports of countries such as China, Germany, and Canada could impede cross-border flow of goods and cash and disrupt supply chains for automakers and other industries
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The Fed made two more interest rate hikes in its June meeting, yet many investors are unsure whether the economy can continue to grow fast enough to justify higher bond yields. Some investors believe US Federal Reserve interest rate hikes have raised the dollar's value relative to emerging market currencies, creating volatility that could also inhibit growth.
"We may have seen the high in the 10 years, if things do not improve with tariffs and in emerging markets," said Andrew Brenner, head of global fixed income at NatAlliance Securities.
Yields rose rapidly at the beginning of the quarter, but retreated from their highs and fluctuated 2.9%. According to some analysts, prices have not yet impacted consumer prices, and many investors see them as negotiating tactics rather than harbingers of a slowdown. But tensions have been debating investors about the impact of tariffs on economic growth and job creation.
"All trade agreements have a long backup," said Jim Vogel, head of government bond strategy at FTN Financial. "They do not necessarily change the [the] economic forecast based on where we are today, the market has realized that tariffs may have an impact."
The increase in yields this quarter has compounded the difficulties in emerging markets As foreign investors withdraw cash from developing economies. Countries whose debt is denominated in dollars are particularly affected by rising yields, some analysts said, as the strength of the dollar often rises alongside US Treasury yields.
Recent data suggest that inflation is picking up Prices are breaking out of a post-crisis track. Rising oil prices have also helped inflate inflation, with US crude rising by about 23% since the beginning of the year.
But as with the tariffs, analysts said that this has not yet led to higher prices for goods. And the ten-year break even rate, which suggests investors' average annual inflation rate over the next decade, has slipped from a recent high in May to finish at 2.12 percentage points on Friday.
Some analysts believe they believe the 10-year yield is likely to exceed this year's high later this year. But even then, the countercurrents will prevent it from rising much higher.
"There is too much geopolitical risk out there," said Gary Pollack, Head of Fixed Income Trading at Deutsche Bank Private Wealth Management. "As yields rise, it will be very slow."
If the Fed raises interest rates four times in 2018, it would be the highest in any year since 2005, when interest rates rose eightfold. Fed funds futures used by investors to focus on central bank policy recently showed a 48% chance that the Fed would raise interest rates twice this year, according to CME data.
The difference between the yields of the two 10-year Treasuries hit this quarter hardest in more than a decade. Several analysts said investors' confidence in the US Federal Reserve signals that it will continue to raise interest rates, which is clouded by skepticism about the longer-term outlook for growth and inflation.
"The Fed has been quite aggressive in its speeches and rhetoric for months," said Tom di Galoma, director and treasury treasurer at Seaport Global Holdings. "They want to raise interest rates to make sure they have enough ammunition when the economy goes into recession."
-Daniel Kruger contributed to this article.