Inflation Rises, US Treasury Yields Climb

The improving US economy has driven inflation in the superpower nation. This is one of the factors driving up the yield on US government bonds. Based on Bloomberg data, the yield on 10-year US Treasury bonds has continued to rise, approaching the 3% level, as shown in the graph below.

US inflation in May 2018 reached 2.8% compared to May 2017 (YoY), while the inflation target for the year-end is only 2%. The rising prices of goods have led investors to demand higher yields to prevent their profits from being eroded by inflation. As a result, the yield on US Treasury bonds reached 2.95% on June 8, 2018.

To curb inflation, the US Federal Reserve (The Fed) has been forced to raise its benchmark interest rate. As is known, The Fed raised its benchmark interest rate by 25 basis points (bps) to 1.75% in March 2018. The improving US economy, which has resulted in high inflation, has led economists to predict that The Fed will again raise its benchmark interest rate by 25 bps to 2% at the FOMC meeting held on June 12-13, 2018. Throughout this year, the US central bank has room to raise its interest rate four times.