The official U.S. Treasury Department fixed the rate cap at 4.95% for 10-year treasuries on October 25, 2023. On October 23, the "5% barrier" was broken, but it failed to gain a foothold. The focus on bond yields and reassurances from the Fed that they are supposedly in control led to a release of tension and a decline in 10-year yields to 4.7 - 4.75% (mid-October levels).
It was the rout in the debt market that led to the stock market crash last week, while the stabilization of treasuries instantly restored the S&P 500 capitalization.
It is worth noting that much of Powell's press conference was devoted to the main pain point of the market - the extreme growth of yields on medium-term and mostly long-term bonds, both government and corporate.
For the first time, there was a direct focus on long-term bonds: "Financial conditions have tightened due to rising yields on long-term securities, which may affect the direction of the MPC, having an offsetting effect (analogous to a rate hike without an actual hike) - the Fed is watching developments closely."
Rates
The possibility of a rate hike remains, but the likelihood of its realization is, as always, uncertain.
There is no set of factors that will be the trigger for a possible rate hike; i.e., there is no benchmark that will determine that this is the level where the Fed will raise rates. The Fed will look at a set of factors and their interrelationships in the context of the situation.
The Fed is not considering a rate cut in the near term - the issue is not even on the current agenda. The only thing that matters is the length of time that restrictive policy will continue until the Fed is confident that the inflation target has been met.
We are nearing the end of the tightening cycle of the MPC, but this is not a promise or a plan for the future as the Fed makes decisions based on actual incoming data and risks in the system. We are studying the incoming data and acting cautiously. The MPC is quite restrictive at the moment.
About balance sheet reduction
The Fed does not view QT (the program to reduce assets from the Fed's balance sheet) as sufficiently affecting the oversupply of securities that would affect long-term rates.
The Fed does not view QT cuts in an environment of high rates on medium and long-term bonds. 1 trillion dollars of balance sheet reduction, given previously accumulated assets, is not something that would cause imbalances in the debt market.
About the economy
The Fed does not view a recession as a hypothetical scenario and believes the economy is strong.
How the economy has responded to the current pace of rate hikes is a historically unusual outcome and does not fit into standard economic models, theories, and forecasts.
Conclusion
Recent developments in the US Treasury bond market, coupled with the Federal Reserve's response, have played a crucial role in shaping the financial landscape. The decision to establish a fixed cap rate for 10-year Treasury bonds helped ease market tensions following the breach of the "5% threshold," leading to subsequent declines in yields. This stabilization of the bond market directly contributed to preventing further turmoil in the stock market. Federal Reserve Chairman Jerome Powell's press conference underscored the central bank's concern about rising yields on long-term securities and their potential impact on monetary policy.