Three Key Reasons Behind the Surge in U.S. Treasury Yields
The conversation commenced with the acknowledgment that yields on U.S. government bonds have witnessed a substantial increase lately. Specifically, the rate on the 10-year Treasury bond reached an apex of 4.3% on August 21, marking the highest point since 2007. Observers highlighted that long-term yields are experiencing the most notable increases, while short-term yields have largely remained unchanged.
Contrary to some assumptions, this sale of Treasury bonds is not motivated by recent data on U.S. inflation, which has shown a notable decline in the pace of consumer price growth. Experts noted that actual inflation rates are even trailing the predictions made by the U.S. Federal Reserve in June.
Furthermore, market speculation regarding upcoming interest rate policies has remained relatively constant. Investors largely anticipate that the Federal Reserve will maintain current interest rates in their September meeting. Betting on the Federal Reserve’s subsequent meeting in November also appears to remain stable, with market participants equally divided on the prospect of a rate hike.
So what’s causing this uptick in bond yields? Analysts identify three principal drivers. First, the resilience of the U.S. economy in a high-rate setting has led some to reconsider what the long-term neutral interest rate may be. This neutral rate serves as an economic stabilizer, neither accelerating nor decelerating economic activities. Recent market movements suggest this rate could now be close to 4%.
Secondly, an expanded issuance of Treasury bills has altered market supply dynamics, catching some investors off guard. This could be creating a demand for higher yields.
Finally, international factors, such as the Bank of Japan’s recent decision to ease its control over 10-year government bonds, could be exerting upward pressure on yields. For a significant duration, Japan has served as a global stabilizer for yields, and this recent shift could be influencing U.S. Treasury yields.
In light of these rising yields, experts suggest that fixed income investments are becoming increasingly attractive, offering decent returns on hold-to-maturity government bonds, especially if the economy faces downturns.
European Economic Outlook Based on Recent PMI Surveys
Turning the focus towards global economics, recent preliminary Purchasing Managers Index (PMI) data was discussed. The PMIs, released the week of August 21, offer initial but reliable insights into the health of the global business cycle. The general trend indicates a gradual slowing down of business activities worldwide, except for Japan, which showed a positive variance.
Experts observed that this deceleration is most evident in Europe. The region has responded to high inflation rates by raising interest rates into restrictive zones, just as the U.S. has done. European financial institutions have also tightened lending norms in light of economic unpredictability. Unlike the U.S., however, banks in Europe have a more significant influence on the real economy.
This prominent role of banks is likely why the European economic slowdown is occurring slightly ahead, and possibly at a faster rate, than in the United States. Analysts emphasize that, for now, this deceleration is relatively marginal.