Federal Reserve’s High Interest Rates Trigger Bond Market Sell-off and Stock Downturn

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Federal Reserve’s High Interest Rates Trigger Bond Market Sell-off and Stock Downturn
Credit: © Reuters.

The bond market has been significantly impacted by the Federal Reserve's commitment to maintain high-interest rates, leading to an extensive sell-off of municipal bonds. This development, which took place on Thursday, was marked by a surge in benchmark top-rated municipal bond yields, recording an increase of up to 10 basis points during morning trading. Consequently, the 10-year yield rose to 3.08%, a rate not witnessed since November. Short-term securities were also affected, yielding 3.55%.

Earlier this week, the Federal Reserve's stance on high-interest rates had already begun impacting long-dated Treasury yields, pushing them to new multi-year highs. This included securities with a decade-long maturity reaching their highest point since 2007.

The stock market also felt the effects of these developments, with the S&P 500 experiencing a significant downturn. The index saw a decline of roughly 1%, marking its lowest point since June.

On Wednesday, the Federal Reserve maintained its interest rates at a 22-year peak. The majority of policymakers appeared inclined towards implementing another rate hike this year. James Bullard, former president of the Federal Reserve Bank of St. Louis, suggested that additional increases might be necessary as a safeguard against potential inflationary pressures making a comeback.

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