Federal Reserve Chair Jerome Powell has given insights into the recent surge in long-term Treasury yields, unintentionally encouraging traders to continue pushing them higher. The rise, which saw the 10-year Treasury note come close to the psychologically significant 5% threshold, is not primarily driven by expectations of inflation or further Fed rate hikes. During a Q&A session following his speech to the Economic Club of New York, Powell explained that the increase is primarily happening in term premiums, which compensate for holding long-term securities. He acknowledged that this rise could tighten financial conditions, potentially substituting for further Fed hikes “at the margin.”
However, Krishna Guha, head of the global policy and central-bank strategy team at Evercore ISI, noted that Powell’s comments lacked urgency in addressing the rise in yields. Powell suggested that bond market volatility should be allowed to “play out.” Guha believes this stance set the stage for a renewed steepening of the yield curve, with longer-dated rates rising more than short-term rates. In fact, the yield on the 10-year Treasury note came within a hair’s breadth of the 5% threshold during afternoon trading and closed at 4.987%, its highest level since July 20, 2007, according to Dow Jones Market Data.
As the bond market continues to experience volatility, investors and traders are closely monitoring the Federal Reserve’s response to evolving market conditions.
The Federal Reserve’s Approach to Rising Yields
As the 10-year Treasury yield approaches a key threshold, many stock-market investors are eagerly awaiting the Federal Reserve’s response. There is concern that the Fed’s recent remarks may be interpreted as a green light to further push yields higher. Investors worry that this bullish growth and hands-off tone on yields could have negative consequences.
The rise in yields has already impacted stock prices, with major indexes experiencing declines. The Dow Jones Industrial Average (DJIA) ended the day down over 250 points, or 0.7%, while the S&P 500 (SPX) and Nasdaq Composite (COMP) saw declines of 0.8% and 0.9% respectively.
Federal Reserve Chairman, Jerome Powell, did acknowledge other potential drivers of rising yields. These include the resilience of the economy, expectations of sustained high interest rates, concerns about rising fiscal deficits, and the Federal Reserve’s balance sheet unwinding process, also known as quantitative tightening (QT). Additionally, there has been a change in the correlation between bonds and equities, affecting their attractiveness as hedges against market shocks.
Powell dismissed one explanation put forward by Minneapolis Fed President Neel Kashkari. Kashkari suggested that if the recent rise in the 10-year yield was due to changing expectations of monetary policy, then the Fed may need to take action to maintain those yields. Powell, however, refuted this notion, stating that it is not primarily about expectations of the Fed doing more.
Overall, investors are closely monitoring the Federal Reserve’s stance on rising yields and eagerly awaiting their next move.