Tremors in treasuries continue

During September, the benchmark 10-year Treasury bond rose from a yield of 4.75% to 5.29%, the highest reading since 2002, according to the St. Louis Federal Reserve.

The 0.54 percentage point increase ranks as the 34th-largest monthly rise since 1962, placing it among the top 5% of all monthly changes over that period (St. Louis Federal Reserve data).

The 10-year is labeled the “benchmark bond” because it serves as the market’s primary reference point for interest rates across the economy, including mortgages, consumer loans, and business borrowing.

While it is difficult to quantify how much each factor is pushing yields higher, we can review the main reasons behind last month’s jump.

What’s going on?

Why are yields marching higher?

1. The Federal Reserve raised the fed funds rate in September, and investors believe additional rate hikes are ahead, according to a closely followed gauge from the CME Group.

But the recent rise in Treasury yields cannot be explained by Fed policy alone. The forces driving the bond market are more complex.

2. The economy also appears to be gaining momentum. The U.S. Bureau of Economic Analysis recently revised Q1 and Q2 GDP growth higher. You see, stronger economic activity lifts the demand for money (loans), putting upward pressure on the price of money (interest rates).
3. While it may be a secondary factor, the AI buildout is fueling hundreds of billions of dollars in new business investment. Some of that spending is being financed through the bond market, and the increased demand for capital may be contributing to higher yields.
4. At the same time, the federal deficit remains large, resulting in a steady flow of new Treasury issuance. That growing supply of government debt may also be exerting upward pressure on yields as investors demand higher rates to absorb it.
5. Finally, concerns about inflation have not fully disappeared. If investors expect price pressures to persist, they typically demand higher yields to compensate for inflation’s erosion of future purchasing power.

If yields are rising primarily because the economy is strengthening, that is not necessarily a cause for concern. In many ways, it reflects a self-correcting mechanism: higher rates can help cool an overheating economy, just as lower rates can provide stimulus when growth slows.

More worrisome are rising yields driven by persistent federal deficits or concerns that inflation may prove more stubborn than expected.

Even so, stocks have thus far largely withstood the surge in Treasury yields, as measured by the Nasdaq and the S&P 500 Index. However, the Dow and the Russell 2000 Index, which tracks smaller-cap companies, have run into a bit more resistance.

I trust you found this review insightful. If you have any questions or would like to talk through your portfolio or other financial goals, please don’t hesitate to reach out to me or anyone on our team.

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