Why Are Treasury Bond Yields the Highest in a Decade? 4 Reasons.

One key reason behind the increase is the expectation the Federal Reserve will keep rates higher for longer. Minutes from the central bank’s July meeting show most officials saw “significant upside risks to inflation” that could require more rate increases. And there has been a 10% increase in the number of investors who expect an interest interest-rate hike by the end of the year, versus a month ago, according to the CME FedWatch Tool.

“The answer is…the Fed. The back end of the curve has bought into the central bank’s very hawkish tone of late,” wrote David Rosenberg, economist and president of Rosenberg Research & Associates.

The Fed’s effort to reduce its balance sheet is also a factor, as it has the same effect as an increase interest rates. The central bank has a goal of reducing its Treasury and agency debt holdings by $95 billion a month, although it has largely fallen short so far. Last week’s cut of $62.5 billion, though, was the largest weekly decrease in its balance sheet since early April. Its balance of $8.146 trillion is also the lowest since July 7, 2021.

“While prior weeks of exceptional Fed Balance sheet reduction this year have not tended to have much of an impact on yields, last week’s large drop in holdings seems to have hit home,” wrote DataTrek Research co-founder Nicholas Colas.

Weakness in loan growth is another factor, because when banks become less willing to offer credit or loan demand decreases, it can have the same effect as an increase in interest rates by the Fed. Small banks showed overall loan growth of 1.9% as of Aug. 9, on a seasonally adjusted basis, the lowest in nearly 12 years, according to data released on Friday. Banks across the nation have been seeing negative year-over-year loan growth rate since mid-July.

The fourth factor cited by strategists is economic data. Weekly jobless claims came in at 239,000 last week, indicating the economy is still strong. Also, second-quarter GDP grew by 2.4%, beating expectations. Taken together, it provides ammo for the Fed to keep raising rates.

“There is no evidence that the U.S. economy is losing momentum at this point,” wrote Sevens Report Research’s Tom Essaye. “The sooner claims drift toward 300k, the better as that will reduce some of the upside pressure on Treasury yields.”

Write to Karishma Vanjani at [email protected].