The reason why Treasury yields are rising isn’t complicated — it’s because investors are demanding more compensation for the risk they are taking when buying government debt. However, it’s the reason behind those demands that tells the story, and whether the surge is likely to continue. From a market standpoint, the burst higher in Treasury yields can be told through the “term premium.” That’s a measure, albeit inexact, of how much extra yield investors are demanding for holding long-term what is largely considered the safest debt instrument in the world. The term premium had fallen to just 3.5 basis points in early September, about a week before the Federal Reserve slashed its benchmark short-term borrowing rate by 50 basis points, or half a percentage point. However, since then, the premium for holding a 10-year zero-coupon note has jumped by about 30 basis points, most recently clocking in at 0.3485%, the highest since early July, according to the Fed’s measure. The moves higher in the term premium closely replicate those of other Treasury yields. (1 basis point equals 0.01%.) Since the Fed’s Sept. 18 rate cut , the 10-year Treasury yield is up nearly 50 basis points following an additional leg up over the past week. The 2-year note, which is more sensitive to Fed rate adjustments, has moved in similar fashion. The mover higher has been weighing on stocks a bit , including on Tuesday. US10Y 1M mountain 10-year Treasury yield, 1 month Market experts are pointing to three main reasons for the move: stronger economic data , worries about the government’s precarious fiscal situation, and rising expectations that Donald Trump , the former president and Republican nominee, could pull off a win in the election two weeks from now. “The bond market seems to be sending a message to fiscal policymakers both in the U.S. and abroad that we have hit a breaking point with global public sector debt rapidly approaching the $100 trillion mark,” David Rosenberg, chief economist and strategist as well as the founder of Rosenberg Research, said in his morning note Tuesday. “The record-breaking gold price would concur. It is interesting that the breakout in bond yields started three weeks ago, just when the betting markets flipped to Trump winning the election,” he added. Those observations come just days after the government revealed a $1.8 trillion budget deficit for fiscal 2024 that included debt financing expenses of more than $1.1 trillion. At the same time, economic data has been solid, with retail sales being the latest metric to come in better than expected, suggesting continued consumer strength. Finally, speculation is growing on Wall Street that Trump has the momentum heading into the election, though virtually all polls show a race too close to call between him and Vice President Kamala Harris , the Democratic nominee. The surge in yields could leave the Fed with a dilemma. Markets remain convinced the Fed will lop off another 25 basis points at its meeting that concludes Nov. 7, two days after the election. However, traders are growing less certain about December, even though the Fed last month penciled in another 50 basis points in cuts this year. “The rise in term premium is the result of higher real interest rates and stronger economic data. Thus, there is no fundamental reason for the Fed to cut again on November 7,” Joseph LaVorgna, chief economist at SMBC Nikko Securities, said in a note Monday. “If this is indeed the case, the front end of the Treasury curve needs to significantly reprice.”
