Treasury 10-Year Yield Tops 5% for First Time Since 2007
The rout has dragged yields in Europe higher too. The yield on German and UK 10-year bonds jumped 8 basis points Monday, back toward multi-year highs.
The selloff over the past two months has been driven by long-dated bonds, which are more vulnerable to an extended period of elevated rates and robust growth. U.S consumer prices advanced at a brisk pace for a second month in September and economic data continues to point to a resilient economy.
What Strategists Say
“After more than a year of being inverted, some of the key segments of the Treasury curve are about to revert to zero. That is usually taken as an imminent sign that the economy is about to contract or even entered a recession — but that isn’t the case this time around. It has more to do with a higher neutral rate and rising real-risk premiums,” according to Ven Ram, Bloomberg’s macro strategist.
“While levels look attractive in the near term, investors are likely to continue waiting for catalysts (such as geopolitical risks or slowing data) rather than catching the falling knife amid technical weakness,” Gennadiy Goldberg and Molly McGown, strategists at TD Securities wrote in a recent note. “This could keep rate volatility extremely high in the near-term.”
Still, 10-year Treasuries above 5% are a buy for Morgan Stanley Investment Management, which sees yields overshooting the firm’s fair value above that level.
Another emerging threat to Treasurys is the changing composition of the market. The Fed is reducing its bond holdings via quantitative tightening, while the holdings of foreign governments such as China’s are waning. In their place, hedge funds, mutual funds, insurers and pensions have stepped in.
The fact that they are less price-agnostic than their predecessors is leading to the revival of the the so-called term premium for bond pricing. That’s where investors seek higher yields to compensate for the risk of holding longer-dated debt.
Longer-term, rates may be pushed above the levels of recent history. A new Bloomberg Economics report concludes the combined impact of persistently high levels of government borrowing, more spending to fight climate change and faster growth will mean a nominal 10-year bond yield in the region of 6%.
In the immediate future, the Treasury market remains on course for an unprecedented third year of annual losses.
Higher borrowing costs may ultimately serve as a brake on the U.S. economy, helping the Fed’s inflation fight. The average rate on a 30-year fixed mortgage soared to around 8% in recent weeks, while the cost of servicing credit card bills, student loans and other debts has also climbed as market rates rose.
Powell echoed some of his colleagues by saying a sustained rise in yields could “at the margin” lessen the pressure for tighter monetary policy. Bloomberg Economics reckons if the recent increase is sustained, it’s the equivalent of about 50 basis points of Fed tightening.
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