What rising Treasury yields are telling us
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Yields on U.S. government bonds — known as Treasurys — continue to climb, thanks to groaning federal deficits, bonkers corporate borrowing and uncertainty about monetary policy under Federal Reserve chairman Kevin Warsh.
Why it matters: Virtually all borrowing costs — for mortgages, business loans, auto financing, etc. — are based in part on bond yields produced by trading in the Treasury market each day.
- When the U.S. government has to pay higher interest rates to borrow — yields are effectively those interest rates — it raises the floor for almost everyone else too, increasing borrowing costs across the economy.
Threat level: If yields go too high, these rising rates discourage economic activity, boost unemployment and can even lead to a recession.
How it works: Bond yields move in the opposite direction of bond prices.
- So a pronounced rise in long-term yields on U.S. government bonds reflects a significant drop in prices for those bonds, or put another way, dropping demand from buyers.
The latest: Last week, investors required the highest yields in roughly two decades to buy some $67 billion in long-term U.S. government bonds.
- The yield on the 30-year Treasury bond ended the week at 5.26%, the highest since June 2007, despite benign reports on consumer and wholesale price inflation. (This is unusual, as long-term yields tend to move lower when inflation becomes less of a worry.)
Zoom out: Analysts say the Treasury market is reacting to a number of dynamics that all point toward higher yields. Here are a few:
- Deficits are getting worse. The Congressional Budget Office last week raised its expectations for the U.S. annual budget deficit to $2.1 trillion — $200 billion more than expected back in February.
- Competition for capital from the AI boom. Tech giants have sold a ton of corporate bonds to fund their data center building. (And some, like Microsoft, have better credit ratings than the U.S. government.) Some investors may be buying those bonds instead of Treasurys.
- Uncertainty about the Warsh-led Fed. Critics say the new chairman's stated opposition to so-called forward guidance — effectively giving the market indications about Fed expectations on the economy and what it expects to do with monetary policy — has increased the uncertainty premium embedded in bond yields — visible in volatility expectations — helping to push rates higher.
What they're saying: "We think uncertainty is the larger driver," Mark Cabana, a bond market strategist with BofA Global Research, tells Axios. "There is literally a price to be paid for the lack of guidance that Warsh seems so set on. And the price is higher interest rates and a higher cost to the taxpayer."
- "The July FOMC left the market with a muddier read on how the Fed's reaction function ought to impact the curve," Goldman Sachs analysts wrote in a note Friday. "In particular, Chair Warsh's suggestion that changes in market yields could substitute for policy action saw volatility creep out the curve as well."
- "The worsening fiscal profile will likely keep long-term yields elevated," wrote Anshul Pradhan, a bond market analyst at Barclays.
The bottom line: It seems like we'll be living in a relatively high-interest-rate world for a while.
