10-Year Treasury Yield Surges to 5%, Reaching a 16-Year High

Date Issued - 20th October 2023

?Author – Emmanuel Baiden ACSI – Senior Research Analyst

The financial landscape witnessed a significant milestone this week as the benchmark 10-year Treasury yield surged to levels not seen in 16 years. This remarkable event followed scrutiny of Federal Reserve Chairman Jerome Powell's remarks.

The yield on the 10-year Treasury crossed the 5% threshold for the first time since July 20, 2007, when it reached as high as 5.029%. This persistent ascent marked the fourth consecutive day of gains, contributing to a substantial increase of approximately 40 basis points in October alone.

2-Year Treasury Yield Experiences a Drop

In comparison to the 10-year yield, the 2-year Treasury yield witnessed a decline of 6 basis points, falling to 5.16%. This shift was noteworthy as it revisited levels last observed in 2006 during the trading session. It is crucial to remember that yields and bond prices have an inverse relationship, where a single basis point signifies 0.01%.

Fed Chair Jerome Powell's Insights on Monetary Policy

Federal Reserve Chairman Jerome Powell's comments played a pivotal role in shaping market sentiment. Powell signalled that current monetary policy was not excessively restrictive. When asked if he felt like policy is too tight right now? He replied by saying no. He acknowledged recent indications of waning inflation but emphasized that it was too early to ascertain a clear trend.

Inflation is still too high, and a few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal," Powell expressed in a prepared speech. He also hinted that adjustments in the labour market and economic growth might be necessary to achieve the Federal Reserve's objectives.

Factors Driving Bond Market Movements

The surge in bond yields can be attributed to several factors, including concerns that the Federal Reserve will maintain benchmark interest rates at higher levels to combat inflation. This perception is reinforced by a consistently robust economy and labour market performance, as well as mounting government deficits, which require increased supply to meet market demands, especially considering the Fed's reduced role as a buyer.

Furthermore, the term premium, the additional yield investors demand due to concerns of rate fluctuations over the term they hold a bond, has increased significantly, contributing to the rise in bond yields. A calculation by the New York Fed indicates that the term premium is currently at its highest level since May 2021.

Tight U.S. Labour Market and Weekly Jobless Claims

On the economic data front, initial claims for unemployment benefits decreased last week, signalling the persistence of a tight labour market in the United States. For the period ending October 14, weekly jobless claims totalled 198,000, which was below the Dow Jones estimate of 210,000.

[Disclaimer: This newsletter provides financial insights for informational purposes only. It does not constitute financial advice or recommendations for investment decisions.]

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