Surge in US Treasury Yields Sparks Concerns: What’s Behind It?

Surge in US Treasury Yields Sparks Concerns

VoM News Desk | October 13, 2023 | 11:48 AM IST | Breaking News | Follow on Google News

Surge in US Treasury Yields Sparks Concerns: What’s Behind It?

Surge in US Treasury Yields Sparks Concerns: What’s Behind It?

The recent surge in US Treasury yields has left investors puzzled and anxious. The yield on the 10-year US Treasury note recently reached 4.88 percent, its highest level since 2007, while the 30-year offering hit 5.05 percent, a 16-year peak. Although yields have pulled back slightly, geopolitical risks have kept them elevated. The primary explanation for the rise is the expectation that the Federal Reserve will maintain a hawkish stance due to the robust US economy.

Market Uncertainty Amid Shifting Fed Expectations

Monetary policy is a significant driver of the rise in long-term bond yields, even though two-year US treasuries are considered a close proxy for Fed interest rates. John Canavan of Oxford Economics explains that the Fed’s perspective is influenced by stronger-than-expected economic growth, increased inflation, and uncertainty, particularly related to surging oil prices.

Uncertainty in the Bond Market

Adam Button of ForexLive acknowledges the bond market’s perplexing behavior, suggesting that something significant is occurring, yet not fully understood by investors. Karl Haeling of LBBW points to the increased bond issuance by the US Treasury Department, which has raised concerns about the long-term sustainability of the US fiscal situation.

Bond Market Shifting Focus

Yardeni Research has observed disconcerting shifts in US treasuries, where investors have shifted their focus from what monetary policymakers may do to growing concerns about fiscal policymakers’ actions. The escalating federal budget deficit is raising worries about an oversupply of bonds that may outstrip demand, necessitating higher yields to clear the market.

Debate Over Causes

Not everyone agrees that deficits are driving higher long-term yields. Nick Colas of DataTrek Research argues that while deficits may contribute, they are not the primary cause. Another factor is the decline in demand, as central banks like the Fed have shifted from buying bonds to selling them, a trend exacerbated by China and Japan stepping back from US Treasury purchases.

Uncertainty About Fed’s Quantitative Tightening

Peter Boockvar of Bleakley Financial Group questions the Fed’s ability to successfully execute “quantitative tightening” due to financial market turbulence. He suggests that if the Fed fails, we may see “perpetually large Fed presence in the markets.”

Supply-Demand Imbalance

The US central bank may need to resume quantitative easing to absorb the massive amount of Treasury supply. Without additional buyers, lower bond prices and higher yields may be inevitable.

US Treasury Demand May Persist

Despite concerns, there’s an expectation that demand for US Treasury securities will endure as long as they are considered risk-free assets. Lawrence Gillum of LPL Financial points out that with Treasury yields at multi-decade highs, demand for them could rise. The aging global population is also expected to contribute to demand for US treasuries.

VoM News Desk

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