Treasury sell-off continues after divided Fed holds interest rates steady

U.S. Treasury yields continued their upward climb on Thursday as investors weighed the Federal Reserve's decision to hold interest rates steady and sought insight on future monetary policy decisions.

At 3:20 a.m. ET, the 30-year Treasury bond had risen more than 9 basis points to 5.236% after hitting its highest level since July 2007 on Wednesday. The benchmark 10-year Treasury yield soared over 8 basis points to 4.7%, and the 2-year Treasury note yield was up 5 basis points to 4.289%.

One basis point equals 0.01%, and yields and prices move in opposite directions.

On Wednesday, the Fed voted to hold its key interest rate steady at a range of 3.5% to 3.75% in a 9-3 vote, at the second FOMC meeting with Chairman Kevin Warsh at the helm.

"Economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East," the FOMC statement said following the decision.

"Job gains have kept pace with the workforce, and the unemployment rate has changed little."

Deutsche Bank analysts also noted the Treasury sell-off continuing overnight and said its economists still expect the Fed to raise rates by 50 basis points this year — meaning a 25-basis-point hike in September and December.

"But they think the FOMC is unlikely to take much comfort in yesterday's market reaction, with the rise in long-end rates coupled with the decline in forward real yields suggesting doubts about an imminent return of price stability," the analysts said.

They added that overall US credit conditions remain supportive, but a steeper yield curve could add pressure to the weak housing market.

Investors will also await the weekly jobless claims and personal consumption expenditures price index reading for June on Thursday.

A Dow Jones estimate expects headline inflation to have grown by 3.7% annually and core inflation, which excludes food and energy prices, to have risen 3.3%.