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The Federal Reserve said on Thursday it would increase its benchmark rate by 2.25 percentage points in the coming weeks, following a spike in bond yields in the wake of the financial crisis.
The move is the biggest since 2008, when the Fed raised its benchmark interest rate twice.
The Fed’s rate hike is expected to bring the annual rate of inflation to about 2 percent, down from about 3 percent now.
The rate hike, which the Fed said would be triggered by a broad-based increase in bond prices, is also expected to push up bond yields.
The U.S. benchmark 10-year Treasury bond yield jumped to 1.74 percent on Thursday.
Treasury bonds have been the best-performing U.N. asset for some time now, but they have been hit by a recent run-up in borrowing costs and are now expected to drop further.
The Treasury’s 10-yr yield fell to 1,811.25 percent on the day.
The 10-yield on the 10-month Treasury rose to 1;25, up from 1.49.
The yield on the five-year note also rose to 2.08 percent, from 2.07 percent.
The yield on 10- and 20-year U.G.M. bond notes also rose.
The 10- y-yr Treasury yield on Thursday, down 1 basis point, was also the highest since 2008.
The Federal Reserve’s decision came a day after the Fed announced it would raise its benchmark overnight lending rate to 0.25% from 0.24%, as it seeks to stabilize the financial system.
The increase in interest rates is a signal to investors that it is time for them to start taking on debt to invest in the economy.
“It’s a step that would make it more appealing for people to borrow and hold money,” said Matt Miller, chief investment officer at Renaissance Capital in Chicago.
“I think that’s going to have a much more significant effect on the economy in the long run than anything else.
This is a pretty significant shift.”
Miller expects the Fed to continue raising rates, though he said the rate hike would likely be smaller than the Fed’s previous hikes, which were about 20 basis points.
Miller said investors should be more cautious about taking on long-term debt, since the rates on long bonds could be very low if the economy improves.
“You could probably hold on to that, but you wouldn’t want to take on too much debt right now, because you’d have to get some income out of it,” he said.
The rise in bond rates came amid a rise in U.K. interest rates to 1 per cent.
The U.B.C. said it will begin to gradually increase its mortgage interest rate next month, a move that has already begun to spur growth in the U.k. economy.
The Bank of England has also said it is raising rates to 0% and will begin gradually increasing rates to the next round in March.