Fed Holds Rates as Long-Bond Selloff Pushes Yields Near 20-Year Highs

The Federal Reserve held interest rates steady on Thursday and upgraded its assessment of U.S. economic expansion from “solid” in September to “strong” in its latest policy statement. Long-dated U.S. Treasury yields have climbed to near 20-year highs this year as selling pressure spread beyond the policy-sensitive front end of the yield curve. Following Chair Warsh’s press conference, bets on further rate increases declined because he gave no clear commitment on future policy action. The 2-year/10-year Treasury yield spread, which had flattened in previous weeks, widened again to as much as 34.1 basis points. Yields on most Treasury maturities from the 5- to 7-year sector and longer rose after the decision. The move reflects investor concern over inflation uncertainty, duration risk and fiscal pressure, while markets are pricing the possibility of another rate increase in December. The Fed said business investment remains strong and job growth is aligned with the size of the labor market, while maintaining its focus on returning inflation to its 2% target.