The Headlines
"Yields are soaring.."
"...because of inflation fears, ..."
"...the Fed..."
"...and geopolitical tensions"
The Reality
Yield levels aren't crazy, yet.
We've been here recently: the 30yr was above 5% in Oct 2023, May 2024 and May 2026.
Also, both the 10yr and 30yr are comparable to their pre-GFC levels.
The rising yields are NOT because of higher inflation expectations.
10-year breakeven inflation (the orange line) has been very stable since 2023.
What's driving the nominal yield post-2023 has been the real yield (the grey line).
In general, real yield rises when investors
- expect higher future real rates, and/or
- demand more compensation for holding long bonds
The expected future NOMINAL short rate (the green bar) has remained in the post-2023 range.
(In other words, it's not the Fed either.)
What's notably rising is the term premium (the orange bar) - investors want more compensation.
The usual culprits that push up the term premium:
Higher Treasury issuance
Larger fiscal deficits or federal debt
Greater interest-rate volatility (proxy: the MOVE Index)
Higher inflation uncertainty (proxy: the Survey of Professional Forecasters)
Reduced Treasury demand from the Fed or foreign buyers
While these factors have contributed to the long-term rise in yields, none has experienced a recent, needle-moving shift. That leaves greater macroeconomic uncertainty as the more likely driver of the recent increase in the term premium.
Where may this uncertainty come from? AI.
Because AI is attacking the economy on all fronts: the labor market, productivity, hyperscalers' astronomical and ever-growing CapEx, and their debt issuance increasing competition for capital, the uncertainty surrounding the economic outcomes has led investors to demand more compensation in the form of higher yields.