Investors were jolted this week as the benchmark 10-year Treasury yield rose to its highest level since 2007, but persistent inflation is just one factor behind this latest surge.
The key 10-year Treasury yieldwhich influences mortgage lending, jumped to 5.23% on Friday, its highest level since 2007. It was the latest rise in the benchmark yield, which earlier this month was trading just below 4.8%. Bond yields and prices move inversely to each other.
The rapid rise in the 10-year yield above 5% shows how quickly investor expectations have shifted toward further tightening by the Federal Reserve in the face of stubborn inflation. Fed funds futures trades show a 64% chance of a rate hike in October, according to the CME FedWatch tool.
Indeed, the University of Michigan Consumer Confidence Index showed that inflation expectations for the coming year jumped to 4.6% in September from 4% in August, the highest reading since June.
As for rising yields, stubborn inflation and growing market anticipation for further rate hikes only tell part of the story, according to Thierry Wizman, global FX and rates strategist at Macquarie Group.
“I think this year it has more to do with bond issuance than inflation,” he told CNBC.
Wizman said yields at these levels are not in themselves unusual, particularly because they are not accompanied by extreme inflation expectations or aggressive Fed tightening.
“We don’t have a Federal Reserve that is tightening aggressively, so a lot of things seem pretty normal. What’s abnormal is we’re in the middle of a very strong investment cycle,” he said.
Massive bond issues
The federal government is issuing debt to finance a large deficit, while companies are borrowing heavily to finance artificial intelligence infrastructure.
Wizman said it was this combination that increased the supply of bonds enough to put upward pressure on yields.
The AI spending boom adds another source of bond supply to compete with Treasuries.
Vanguard estimates that Alphabet, Amazon, Meta Platforms, Microsoft and Oracle issued about $132 billion in debt through July, up sharply from the annual average of about $35 billion between 2020 and 2024. Broader AI-related debt issuance could reach $300 billion to $570 billion this year, as companies in the data center, semiconductor and services ecosystem public borrowing to finance construction.
At the same time, higher yields can weigh on stocks by raising borrowing costs for companies and making bonds more attractive to income-seeking investors.
Wizman said capital spending plans by hyperscalers and their suppliers would likely keep bond issuance high this year and next.
“So these yields could increase,” he said.
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