The yield on the benchmark US 10-year Treasury note climbed back above 5% on Wednesday as investors positioned for the Federal Reserve's policy decision later in the day. The 10-year yield rose to about 5.01%, while the dollar index held near a two-week high at around 102.42.

Why yields are rising now

Demand for safe-haven government bonds weakened as sentiment towards artificial intelligence improved, with major technology earnings due after the US close from Microsoft and Alphabet expected to offer fresh evidence on AI demand. The AI sector has been a major support for US economic growth, and a recent global technology sell-off had previously pushed investors towards safer assets. That flow has partly reversed. Thirty-year Treasury yields traded close to 5.32%, and two-year yields nudged higher to around 4.75%, as bond markets across Europe also moved up ahead of the UK Budget and the Fed announcement.

What the Fed decision will, and will not, settle

The Federal Reserve is widely expected to leave interest rates unchanged at 3.75% to 4.00% when its two-day meeting concludes on Wednesday, with markets pricing roughly a 90% chance of a hold. Attention will instead focus on Chair Kevin Warsh's press conference and any signal about a further rate increase in December. Persistent inflation, particularly from higher energy costs, has complicated the central bank's outlook, and investors will also watch Thursday's US GDP and PCE inflation data. A moderately hawkish message could put further pressure on shares and support the dollar, while higher Treasury yields raise borrowing costs across the economy, since they feed into mortgage rates, corporate debt and the valuations investors place on companies whose profits lie furthest in the future.

Sources: Wall Street Journal / Dow Jones (via TradingView) and TradingView News.