Dear Investors,
Moody’s Analytics – (11 Yields Approaches) Ten-Year Yield Approaches 5%
Inflation continues to de-escalate and there are a growing number of headwinds that threaten to knock the U.S. economic expansion off course.
Treasury yield
The 10-year U.S. Treasury yield is a singularly important figure for global finance.
It establishes the affordability of corporate debt and mortgage rates, which ultimately determine the U.S. economy’s trajectory.
Since late summer, however, the 10-year yield has accelerated higher, now approaching 5%.
It is now at its highest rate since 2007 and is quickly pushing up borrowing costs elsewhere. The fixed-rate 30-year mortgage rate has climbed close to 8%, its highest since 2000.
FOMC Update
The FOMC hasn’t lifted its policy rate since July, but longer-dated interest rates have not only kept going, but picked up steam.
Deciphering exactly why is more art than science. Investors appear to have come to the realization that elevated inflation is set to stick around longer than previously assumed.
The U.S. economy’s surprising resilience has caused forecasters and investors to revisit their assumptions.
Moody’s view
Moody’s Analytics expects the 10-year yield settles near 4% in the intermediate term.
The current yield, then, is not a concerning distance from our forecast.
The speed at which its risen of late, however, is. The sudden, rapid increase in bond yields will dissuade business investment and spending.
Rothschild – (10 Macro Updates) New concerns after higher bond yields
Most investors continue to foresee the resilience of the global economy despite the fastest global monetary policy tightening in four decades.
US economy too resilient
US economy has so far proved unexpectedly resilient, with household spending supported by a run-down of excess savings accumulated during the pandemic.
Furthermore, fiscal policy played an unappreciated role.
After record spending in 2020 and 2021 to combat the impact of the pandemic, the federal deficit dropped by the greatest amount ever in 2022, falling from close to $3 trillion to roughly $1 trillion.
Higher for longer
Headline inflation in most G20 advanced economies has roughly halved from peaks seen in 2022, most of the adjustment is explained by commodity prices’ base effects.
In fact, core inflation has yet to turn down decisively, held up by cost pressures and high margins in some sectors.
Central banks have insisted monetary policy would remain tight for some time, despite investors somewhat downplaying the warning. The recent rise in sovereign yields suggest that the message is finally sinking in.
Yields very high
The rise in yields can also be explained by risks regarding public finances.
Rising public indebtedness has been a global phenomenon, with the average government gross debt of G7 economies rising from 76 to 131 per cent of GDP over the first 23 years of this century, thus reaching generational highs.
Most governments have struggled to rebuild their fiscal resilience during the interludes between the Great financial crisis, the European debt crisis, the pandemic and the energy shock in the wake of Russia’s invasion of Ukraine.