In the US bond market on the 23rd, the yield on the 10-year Treasury note briefly exceeded 5%, reaching its highest level in 16 years. This is a level that was hardly expected during the long period of ultra-low interest rates that followed the financial crisis.
Yields have since fallen sharply, likely as investors exit profitable short bond positions in recent weeks. However, reaching the milestone on the morning of the 23rd highlighted a troubling reality. A new era appears to be dawning in the U.S. Treasury market, and confidence in any predictions about where yields will peak is challenged.
The Federal Reserve is likely at or near the end of its most aggressive rate hike cycle in decades. But at the same time, other factors continue to push yields higher. The US economy is surprisingly resilient, and inflation remains high. The federal government’s budget deficit is skyrocketing, testing the market’s ability to absorb a seemingly endless supply of new debt.
Some believe that the impact of rising yields will spread to all costs, including credit cards and corporate loans, and that pressure on the U.S. Federal Reserve to raise interest rates will ease, leading some to hold on to their predictions that yields may be near their peak. On the other hand, there are opinions that the shackles on yields have been removed and that another rise in yields is not just a pipe dream.
The views of market participants are summarized below.
Tracy Chen, Portfolio Manager, Brandywine Global Investment Management:
“I don’t think 6% is a pipe dream. Interest rates will remain higher for a long time. The most important reason is the strength of the fiscal spending trend. It’s not just a cyclical rise in yields; a regime change is underway. It’s not just the strong economy; it’s more structural, with factors such as a potential rise in the long-term neutral rate and the return of the term premium on U.S. Treasuries to their historical averages.”
Chen is also preparing for the possibility that Moody’s Investors Service, the only rating agency that continues to give the United States a “AAA” rating, may downgrade its rating. He is also wary of the Bank of Japan abolishing its yield curve control (YCC), which kept Japanese interest rates at low levels and increased demand for U.S. Treasuries. All of these could spur interest rates to rise.
John Fass, Managing Partner of BTG Pactual Asset Management:
“We are definitely in uncharted territory and anything is possible in terms of yields right now.Governments cannot afford to spend like drunken sailors when funding costs beyond their control are rising dramatically. But we have to wake up to that fact. But U.S. Federal Reserve officials have been making even more dovish statements recently, as rising interest rates have caused the market to tighten financial conditions on their behalf. One thing is certain: Something is going to break on the financial front. It’s not just the nominal rate of interest rate hikes by the U.S. Federal Reserve. Interest rates rose from zero to 1%, from 1% to 2%, from 2% to 4%, and now 5%. %. So there will be a huge impact on consumer spending and borrowing.”
news-rsf-original-reference paywall">Original title:New Age for Treasuries Means 6% Yield Isn’t ‘Out of the Picture’(excerpt)
2023-10-24 01:57:00
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