(Sept 17): Global bond yields retreated on Thursday, calming a pressured market after the US Federal Reserve’s (Fed) rate hike and chairman Kevin Warsh’s vow to tame inflation, while traders awaited Friday’s Bank of Japan (BOJ) decision.

Yields on 10-year Treasuries fell three basis points to 4.99%, ending eight days of gains. Those on similar-tenor notes declined three basis points and less than one basis point in Australia and Japan respectively.

The average yield on global government bonds climbed to a 19-year high this week as escalating Middle East tensions drove up oil prices, fanning inflation expectations. The Fed raised interest rates by a quarter percentage point in a widely expected move on Wednesday, while the median policymaker projection indicated one more hike later this year.

“The Fed had no choice but to give the market a hike or risk a much bigger bond market sell-off,” said Byron Anderson, the head of fixed income at Laffer Tengler Investments. “The market narrative is on a collision course with the Fed from here on out, which means more volatility. A single rate cut is not going to placate this bond market for long and will not solve inflation.”

The central bank’s favoured inflation gauge stood at 3.7% in July, close to the highest since 2023 and above the Fed’s long-run target of 2%. Warsh said inflation readings during summer don’t tell him that underlying trends have meaningfully improved.

“For the bond market, this is likely to cast a long shadow rather than create a short-lived storm,” said Hebe Chen, a market analyst at Vantage Global Prime. “The front end now has to price the possibility of further Fed tightening, while the long end is already wrestling with inflation, heavy issuance and fiscal concerns — meaning even when the initial volatility settles, the gravitational pull of higher yields may remain.”

While digesting the Fed decision, investors were also shifting their attention to the BOJ as it started its two-day policy meeting on Thursday. All BOJ watchers surveyed by Bloomberg expect the central bank to raise its policy rate to 1.25% from 1%.

US Treasury Secretary Scott Bessent has expressed strong support for Japan’s decisive market and monetary steps to address the substantial undervaluation of the yen, according to a readout.

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