Investors were spooked this week when the benchmark 10-year Treasury yield rose to its highest level since 2007, but persistent inflation is just one factor in the surge.
key 10 year government bond yieldYields that affect mortgages rose to 5.23% on Friday, the highest level since 2007. The most recent level is above the benchmark yield, which was trading just below 4.8% earlier this month. Bond yield and price are inversely proportional to each other.
The rapid rise in the 10-year Treasury yield above 5% shows how quickly investors’ expectations have shifted to further tightening by the Federal Reserve given stubborn inflation. Federal funds futures contracts have a 64% chance of an October rate hike, according to the CME FedWatch tool.
Indeed, according to the University of Michigan’s Consumer Confidence Index, year-on-year inflation expectations jumped to 4.6% in September from 4% in August, the highest level since June.
Thierry Wismann, global currency and rates strategist at Macquarie Group, said stubborn inflation and rising market expectations for further rate hikes only told part of the story when it came to rising yields.
“I think this year has more to do with bond issuance than it does with inflation,” he told CNBC.
Wisman said yields at this level are not unusual in and of themselves, especially since they are not accompanied by extreme inflation expectations or aggressive Fed tightening.
“We don’t have an aggressively tightening Federal Reserve, so a lot of things look quite normal. What’s abnormal is that we’re in the middle of a very strong investment cycle,” he said.
Large amount of corporate bond issuance
The federal government is issuing debt to finance huge deficits, and businesses are borrowing heavily to fund artificial intelligence infrastructure.
Wisman said this combination has increased bond supply and put upward pressure on yields.
The AI spending boom is creating a new source of debt that competes with U.S. Treasuries.
Vanguard estimates that Alphabet, Amazon, Metaplatform, Microsoft and Oracle have issued about $132 billion in bonds through July, up from an annual average of about $35 billion from 2020 to 2024. Broad AI-related bond issuance could reach $300 billion to $570 billion this year as companies across the data center, semiconductor, and utility ecosystems borrow to finance expansion.
At the same time, rising yields could pressure stock prices by raising borrowing costs for companies and making bonds look more attractive to income-seeking investors.
Wisman said the increase in corporate bond issuance is likely to continue this year and next due to capital spending plans by hyperscalers and their suppliers.
“Therefore, yields could rise further,” he said.
