U.S. Treasury yields are at highs since 2002 and could continue to rise
Quick Look
- Treasury yields continue to rise, with the 30-year bond hitting its highest level since 2002 at 5.62 percent.
- Analysts at a major US bank see further upside potential due to inflationary pressures, rising government debt and corporate bonds, while the Fed has no current plans to cut interest rates due to a robust labor market and above-target inflation.
AI-generated summary
Why It Matters
U.S. Treasury yields have risen in recent months, driven by interest rate expectations, inflationary pressures and geopolitical developments such as the Iran war. The 30-year bond recently reached its highest level since 2004, before rising to 5.62 percent - the highest level since 2002.
The yield level on US government bonds continues to shift upwards. But the current level doesn't have to end there, say analysts at a major US bank.
Traders on Wall Street: Bond market yields only seem to be going up at the moment. Photo: AFP
Dusseldorf. The yield level on the US bond market is reaching dimensions not seen in almost a quarter of a century. The yield on American government securities with a term of 30 years peaked at 5.62 percent on Tuesday. This is the highest level since 2002.
The yield on ten-year US Treasuries is currently still at the level of 2007, but is also approaching the level of 2002. It is the reference value for mortgage loans, car loans and, in some cases, credit card interest. The higher the yields, the more expensive financing becomes for US consumers.
Just last week, the yield on the 30-year US government bond reached its highest level since 2004. However, the increase appears to be continuing slowly but so far unstoppably and extends over the entire term (the daily high is indicated in each case):
three-month term: 4.23 percent
six-month term: 4.45 percent
one-year term: 4.58 percent
two-year term: 4.96 percent
five-year term: 5.11 percent
Ten-year term: 5.29 percent
30-year term: 5.62 percent
The shorter the maturities, the more strongly the yields react to monetary policy decisions. The two-year government bond is considered a benchmark for interest rate expectations on the market. The US Federal Reserve recently raised its key interest rate to 3.75 from 4.00 percent.
This means that the yield on two-year US government bonds is pricing in almost four more interest rate hikes. Interest rate traders currently see a probability of almost 60 percent that the Fed will raise the key interest rate twice more by 0.25 percentage points each by the end of the year.
Energy prices, government debt and corporate bonds have an impact on the market
However, it is not just interest rate expectations that drive returns. The longer the term, the more the bonds react to geopolitical and fiscal policy decisions. There are current developments in both fields that are driving returns.
Energy prices have risen worldwide as a result of the Iran war. This increases the risk of inflation. In addition, the US national debt continues to rise. In August they exceeded the $40 trillion mark for the first time.
The increase in yields is also reinforced by corporate bond issues. Tech companies in particular are increasingly using this to finance their investments in artificial intelligence. These corporate bonds with high credit ratings compete with government bonds for investors. This also drives the return.
Because consumers are increasingly feeling the increase in yields, “affordability” will be an important campaign issue in the midterm elections in November. US President Donald Trump has therefore repeatedly called for interest rate cuts from the Fed.
No basis for interest rate cuts
However, economists currently see no basis for interest rate cuts. The Fed has a dual mandate: price stability and maximum employment.
The labor market in the USA remains robust. Other economic indicators also mostly point to a stable economy. That wouldn't justify a rate cut. At the same time, the annual inflation rate was 3.4 in August, above the Fed's target of two percent. This also speaks against an imminent interest rate cut.
Since the higher financing conditions have not yet put an undue burden on companies, the stock market is also reacting comparatively cautiously to the increase in yields. On Tuesday, the major indices were only slightly in the red, and record levels are not far away.
Related topics
FedUSA Bank of America
The equity strategists at Bank of America (Bofa) point out that in the past, stock market valuations have only come under greater pressure when ten-year bond yields have risen above seven percent.
The Bofa analysts therefore wrote in an analysis on Tuesday: “Even if this is not our base scenario, it leaves room for further interest rate increases until the financial conditions become significantly more difficult.” So yields could rise even further.
More: Do stocks really always lose when bond yields rise?
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What to Watch
AI outlook — possibilities, not facts
The yield on ten-year US government bonds could continue to rise until financial conditions tighten significantly.
Possible · Within weeks
The Fed is expected to raise the key interest rate twice by 0.25 percentage points by the end of the year.
Likely · Within months
Open Questions
- How long will the current upward trend in yields last?
- What specific effects do rising yields have on private consumption in the USA?
- Is the Fed planning a change in interest rates in the future despite current data?
