Sharp Sell-Off in Long-End Yields Blasts Fed's Price Stability Promise

The Federal Reserve's July FOMC meeting saw no change in interest rates, but it was the subsequent press conference that sparked market reaction.

Chairman Kevin Warsh faced three dissenting votes for a rate hike from committee members Lorie Logan, Beth Hammack, and Neel Kashkari.

The real story unfolded during the press conference, where longer-end US Treasury yields plummeted by nearly 10bps, with the 10-year yield rising to 4.67%.

This was accompanied by a sharp increase in inflation expectations, as proxied by the US breakeven inflation rate, which rose closer to 2.27%. Meanwhile, real yields remained relatively unchanged, and the S&P500 dropped by 1.7%.

MUFG Research sees this market reaction as a clear message that 'talk is cheap' and that the Fed must follow through on its promise of price stability under the new regime.