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The market for US Treasuries has experienced significant turbulence in the past week, with the 10-year yield reaching its highest levels since 2007. This surge in yields can be attributed to the Federal Reserve’s recent projections, which indicated that the central bank is unlikely to cut rates or loosen policy in the near future. Fed Chair Jay Powell made it clear that a soft landing is not his baseline expectation, and he acknowledged that there are factors beyond their control that could impact economic growth.
This sudden increase in treasury yields has some strategists drawing parallels to historical events, particularly the financial crisis of 2008. Marko Kolanovic, a JPMorgan strategist, has been bearish this year and remains so. He points out that while the S&P 500 is still up for the year, the gains are concentrated in a small number of tech stocks, with the rest of the market struggling to perform. He believes that macro fundamentals are challenging and that there are headwinds for risky assets.
Kolanovic highlights the rapid pace of rate increases and the rising cost of debt across the US economy. This trend is concerning, especially when compared to the increase in interest rates leading up to the financial crisis in 2008. He urges investors to closely monitor the impact of the interest rate shock on different segments of the economy.
Bank of America strategists predict that long-dated Treasury yields could continue to rise. They believe that US Treasuries are becoming an attractive alternative to risk assets. They expect rates to keep rising until there is a negative feedback loop from the real economy or risk assets, or until enough rate cuts are priced out to stabilize the market.
TS Lombard points out that as global central banks reduce the size of their bond portfolios, someone needs to buy the extra supply of debt. “Real money” investors, hedge funds, and US households have stepped in to fill this gap. However, the supply and demand imbalance has put upward pressure on yields.
Despite all the issuance of US Treasury debt, there is still uncertainty surrounding how a potential government shutdown could impact rates. Past government shutdowns have had minimal impact on rates, but the current situation is different as interest rates are on the rise.
In conclusion, there are concerns about the market for US Treasuries as yields continue to climb. Experts draw comparisons to historical events, particularly the financial crisis of 2008. It is important for investors to closely monitor the impact of rising interest rates on different sectors of the economy. Additionally, as global central banks reduce their bond portfolios, there is a need for buyers to absorb the extra supply of debt. Lastly, the possibility of a government shutdown adds another layer of uncertainty to the market.
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