Long-dated Treasury yields reached their highest closing levels in well over a decade on Thursday, undermining investors’ confidence, injecting uncertainty in the stock market, and threatening the U.S. housing market. The benchmark 10-year yield finished at its highest close since Nov. 7, 2007, at 4.307%, while the 30-year rate ended at 4.411% or its highest since April 28, 2011. The 30-year rate has jumped 87.3 basis points since April, while its 10-year counterpart has soared more than a full percentage point since then.
Conventional wisdom is that rising long-term yields tend to reflect a combination of greater optimism about U.S. economic strength, the prospects for future inflation, and investors’ demands to be compensated for the risk of those future price gains. This time around, inflation expectations are still elevated, but easing, and there’s a bit more going on. Nicholas Colas, co-founder of DataTrek Research, said “the root cause” behind the U.S. government-debt market’s moves is higher real yields and that the 10-year Treasury yield could “easily reach” 4.5%-5%. Real yields reflect the difference between the expected levels of inflation and nominal Treasury rates.
Long-dated Treasury yields reached their highest closing levels in well over a decade on Thursday, causing concern among investors and posing a threat to the U.S. housing market. The benchmark 10-year yield closed at 4.307%, its highest since November 2007, while the 30-year rate ended at 4.411%, its highest since April 2011. Rising long-term yields typically reflect increased optimism about the strength of the U.S. economy and expectations for future inflation. However, this time around, inflation expectations are still elevated but easing. The root cause of the market’s moves is higher real yields, according to Nicholas Colas, co-founder of DataTrek Research. He believes the 10-year Treasury yield could easily reach 4.5%-5%.
The increase in real rates is a reminder that current levels are far from those historically associated with tops for this component of nominal interest rates. Even if inflation expectations decline to 2%, Colas predicts that nominal rates could range between 4% and 4.7% over the next six to 12 months. The 10- and 30-year Treasury yields represent the bond market’s outlook for the long-term trajectory of the U.S. economy. These yields now reflect the possibility of higher-for-longer fed-funds rates and higher real yields, while unwinding the risk of an imminent recession.
The minutes from the Federal Reserve’s July meeting indicated that policy makers want to see higher real yields across all maturities to slow growth and contain inflation. This has led to uncertainty in the stock market and dampened investor confidence and valuations. Real long-term rates of 2%-3%, similar to those seen in 2006-2007, could also reduce consumption and investment by increasing the cost of consumer debt and corporate cost of capital.
The Treasury market is entering a "higher-for-longer" environment for U.S. rates, which may be unsettling for investors who are accustomed to easy borrowing. Both the 10-year Treasury and 10-year TIPS yields are now at levels historically considered normal for the U.S. economy. However, this could have a negative impact on the housing market. Economists predict that mortgage rates could climb to 8% if the economy continues to show signs of strength and the Fed raises its benchmark interest-rate target again. Last month, policy makers raised borrowing costs to between 5.25% and 5.5%, the highest in 22 years.
Overall, the surge in long-dated Treasury yields reflects higher real rates and poses risks to the stock market and the housing market. Investors should be prepared for the possibility of further rate hikes and should consider the potential impact on the economy and their investment portfolios.
