Yield Curve Rises as Fed Holds Rates Steady

The Federal Reserve's decision to hold rates steady has sent shockwaves through markets, particularly in the long end of the yield curve. The Fed's unchanged decision led to a significant increase in the 2-year yield, with some market participants positioning for a possible hike.

However, despite the statement adding little new information, the steam has been taken out of rate hike risk talk, at least for now. The path of least resistance remains a build towards a hike, but experts don't think the Fed will act unless there's a significant escalation in the Iran war.

The long end of the yield curve, however, has not taken the unchanged outcome well, with long bond yields rising to 5.2% at one point. Chair Warsh noted this rise and the increase in real yields as the market is tightening for the Fed, implying that a hike would be more likely than a cut.

The Bank of England's meeting next is expected to have little change to policy rates, despite hawkish market pricing. Markets are sensitive to oil price swings, with every $10 move higher in oil adding 20bp of expected BoE tightening.