U.S. Treasury yields have surged to multi-year highs, prompting analysts to declare that a "new normal" of 5% yields has arrived in the U.S. financial market.
On September 25, the yield on 10-year Treasury bonds reached its highest level since 2007, while the 30-year yield hit its highest point since 2004. The 10-year yield rose to 5.163%, and the 30-year yield climbed to 5.488%.
Not only in the U.S. but also in other major countries, Treasury yields are on the rise. Japanese government bond yields reached their highest level since 1996 on September 24. According to Bloomberg's global bond index, the average yield on government bonds worldwide is now 4.04%, the highest since 2000.
The recent increase in yields is seen as a return to normal levels after the ultra-low interest rates that followed the global financial crisis and the COVID-19 pandemic. Contributing factors include soaring international oil prices due to the Iran war, increased investment in artificial intelligence (AI), significant fiscal deficits, rising national debt, and the Federal Reserve's tightening policies.
Vincent Reinhart, chief economist at BNY Mellon, told Bloomberg, "The historically low interest rates were actually the exception," asserting that a 5% yield on U.S. Treasuries has now become the new standard.
Some analysts argue that the current high Treasury yields are somewhat inevitable given the state of the U.S. economy. Data compiled by Bloomberg shows that the U.S. economy is growing at a nominal rate of over 6%, with the fiscal deficit reaching approximately 5.5% of GDP. As the economy grows rapidly and government bond issuance increases, the likelihood of maintaining high Treasury yields rises.
Particularly, as the 30-year Treasury yield continues to surpass previous peaks, analysts find it challenging to predict how high it might go. Isaac Brook, a strategist at RBC Capital Markets, noted to Bloomberg, "There is no clear benchmark for market participants to reference," suggesting that yields could continue to rise.
Investors are anticipating further increases in Treasury yields. A Bloomberg survey of 173 market participants this week revealed that more than half expect the 30-year Treasury yield to reach 6% by the end of the year. If the 30-year yield surpasses 6%, it would be the first time since the dot-com bubble burst.
Key variables influencing future interest rate direction include the Iran war and Federal Reserve policies. U.S. Treasury Secretary Scott Vessenet has recently claimed that the primary cause of rising Treasury yields is the increase in oil prices due to the Iran war. He suggested that once the conflict ends, energy supply could increase, leading to a decline in both oil prices and Treasury yields.
However, some investors view rising energy prices as just one of several risk factors, with the Federal Reserve's future interest rate decisions being the most significant variable. Concerns have been raised that if the Fed continues to raise rates to combat inflation, it could slow the U.S. economy and put pressure on the stock market.
The market is currently pricing in the possibility of three more 0.25 percentage point increases in the Fed's benchmark rate over the next year. If additional rate hikes materialize, the benchmark rate could rise to between 4.75% and 5%. This could exert upward pressure on long-term Treasury yields, suggesting that high yields may persist for the time being.
* This article has been translated by AI.
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