US Treasury Yields Poised for Further Rise Amid Fed Inflation Fears

T. Rowe Price's Arif Husain warns that long-term US Treasury yields will continue to rise unless investors receive convincing signals from the Federal Reserve that it remains committed to fighting inflation.

The latest sell-off in long-term government bonds, despite the Fed's decision to leave interest rates unchanged last week, suggests market doubts about the central bank's resolve on containing price pressures.

Husain said that investors are demanding a more forceful demonstration of the Fed's credibility, with an immediate hike seen as clear proof. Without such proof, he expects long-end yields to rise in the short term, potentially larger if economic data comes in hot or oil prices surge towards $100 per barrel.

The impact could extend beyond government bond markets, with Warsh-led Fed's preference for a smaller balance sheet and reduced reliance on forward guidance increasing volatility over the medium to long term. This volatility may initially emerge in rates markets before spreading into credit and equity markets.