Bond Yields Reach Highest Level Since 2008
August 18, 2023
There is a persistent uptick in bond yields with increases recorded across the board, maintaining an upward trend that commenced almost three months ago at the dawn of summer. On Wednesday, the yield on the benchmark 10-year Treasury (US10Y) hit a new high at 4.25%, the loftiest since 2008, and then proceeded to make overnight gains by an additional 4 bps, settling at 4.29%. The catalyst for this yield surge appears to be the recently disclosed minutes from the Federal Open Market Committee (FOMC), hinting at the necessity for more interest rate hikes.
Insights from FOMC Minutes
The FOMC minutes revealed, “Given the persistence of inflation significantly above the Committee’s long-term objective, coupled with a rigid labor market, majority of the participants are seeing substantial upside inflation risks which could necessitate further monetary policy tightening.” The participants also registered a considerable level of uncertainty about the overall effects on the economy of past tightening of monetary policy. Emphasis was also placed on clear communication regarding the Committee’s data-dependent approach to policy and its unwavering commitment to bring inflation back down to its 2% target.
Market Reactions and Outlook
Investors are assessing the latest occurrences and how increasing yields compare with stock valuations. Despite several missteps in the equity market throughout August, the influx of better-than-anticipated economic data persists. For those forecasting the Federal Reserve to halt its cycle of interest rate hikes shortly, buying the dip continues to be the preferred strategy. Conversely, some argue that 10-year yields exceeding 4% remain an attractive buying proposition, particularly when compared to the potential returns from highly-priced stocks and multiples which may be less attractive.
Lawrence Gillum, Chief Fixed Income Strategist at LPL Financial, suggested, “This higher-for-longer narrative is emanating from the Fed, prompting both nominal rates and real rates to continue their upward trajectory.” The key question is whether they can sustain this momentum. With the 10-year Treasury yields directly affecting mortgage rates, their increase may trigger more tension in the housing markets. The 10-year TIPS rate, on the other hand, tends to sway investment alternatives, leading investors to opt for TIPS over riskier choices.