Aug 18, 2023 - Economy

Benchmark Treasury yield hits 15-year high

Data: FactSet; Chart: Axios Visuals

The yield on the 10-year Treasury note soared to a 15-year high this week.

Why it matters: That's bad news for folks who want to take out a new mortgage — but it may also signal good news about the U.S. economy.

  • Much of the movement has been driven by investors coming around to the narrative of a soft landing for the economy and a higher-for-longer rates environment, says Jim Caron, co-lead global portfolio manager at Morgan Stanley Investment Management.

State of play: The 10-year yield, to which most U.S. mortgages and corporate borrowing is benchmarked, has climbed nearly a full percentage point since early May, to 4.3%.

Yields go up as prices go down, which happens when more investors are selling than buying. So, what's behind all the selling?

  • Some context: Shorter-term Treasury bills have yielded over 5% for much of this year — significantly more than what you'd get paid to buy the 10-year.
  • The reason to hold onto the lower-yielding 10-year instead, the thinking went, was that a recession was on its way and rates would all come down, Caron says. That would push prices of the 10-year notes higher, and investors would pocket the gains.

Yes, but: A string of strong economic data and a strong Q2 earnings season have more investors migrating to Team Soft Landing.

  • Meanwhile, the Fed rate-setting committee's messaging has hammered home its intention to keep the policy rate where it is — or higher — until members are certain they've licked inflation.
  • As such, more investors have sold 10-year Treasuries and shifted into more yieldy short-term bills — like the 3-month, a proxy for the Fed Funds rate.

The bottom line: "Given that people are pushing out [their expectations for] recession into the future, there's an opportunity cost to buying long-duration bonds," Caron says.

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