New Age for Treasuries Means 6% Yield Isn’t ‘Out of the Picture’

by Liz Capo McCormick, Elizabeth Stanton of Bloomberg News, 10/24/23

On Monday, the 10-year Treasury yield climbed over 5%, a 16-year high. It’s a level few would have predicted during the long run of rock-bottom interest rates that followed the Great Financial Crisis.

The yield swiftly retreated, perhaps as investors closed out short bets against bonds that paid off in recent weeks. But the Monday morning milestone underscored a troubling reality: a new era appears to be dawning in the US Treasury market — and it’s shredding confidence in any predictions for where yields will peak.

The Federal Reserve may very well be at — or near — the end of its most aggressive interest rate-hike cycle in decades. But at the same time, other forces have continued to push yields higher. The economy has remained surprisingly resilient. Inflation is stubbornly high. And the federal budget deficit is surging, testing the market’s ability to absorb a seemingly endless supply of new US government bonds.

The upshot is that some are sticking to their calls that yields may be near their peak as the impacts ripple through the cost of everything from credit cards to corporate loans, taking the pressure off the Fed to raise rates further. Others, though, say that yields have become untethered and another push higher is far from out of the question.

Here’s a roundup of some views:

Tracy Chen, a portfolio manager at Brandywine Global Investment Management

“I don’t think 6% is out of the picture. Rates will stay higher for longer with the most important reason for this being the high propensity for fiscal spending. We are in a regime change as opposed to the rise in yields just being cyclical. The move is not just because of the resilient economy, it’s more structural” due also to forces including a potentially higher long-run neutral rate and term premium in Treasuries moving back to historical averages.

Chen also is bracing for Moody’s Investors Service, the only rating company that still has a AAA grade on the US, to potentially downgrade it and is wary that Japan will abandon its yield-curve control policy that’s kept rates there low and bolstered demand for US Treasuries. Both of those could an add more fuel to the breakout in rates

John Fath, managing partner at BTG Pactual Asset Management

“We are definitely in unchartered territory and anything is possible now with yields. The government has to wake up to the fact that they can’t just spend like drunken sailors – especially as their financing costs, which are out of their control, are rising dramatically. But the Fed is talking more dovishly lately because the market has tightened for them, given the rise in rates. What I can say, without a doubt, is that something is going to break here financially. It’s not just the nominal amount of Fed policy increases. It’s the amount of doublings that’s going – we went from a funds rate of zero to 1%, then 1% to 2% then 2% to 4%” and now over 5%. “So this is going to have a massive impact on consumer spending and borrowing.”