The Headlines
"Yields are soaring.."
"...because of inflation fears, ..."
"...the Fed..."
"...or 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
None of these factors has shown a needle-moving change recently, leaving a more likely driver of the increase in term premium: greater macroeconomic uncertainty.
Where may this uncertainty come from? AI.
We believe that, 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.