Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / Why the 10-Year Treasury Yield Is Stuck Above 4.5 Percent
Transcript
- Lucas: The ten-year Treasury yield closed today at four point five seven percent. That's up about two percent on the week, and we're now looking at the highest level since mid-May. Luna: Yeah, and the thirty-year bond is even more striking — five point zero seven percent. That's a level we haven't seen sustained since before the 2008 financial crisis. Lucas: Right. And it's not just a US story. Yields have been creeping up globally. But the question is: what's driving this particular leg higher? It's not exactly the same story as the 2023 selloff. Luna: What's different this time? Lucas: Back in 2023, the move was largely about the Fed hiking and signaling higher for longer. Now, the Fed's held steady for months — the effective fed funds rate is three point six three percent, which is flat month-over-month. So this isn't about rate hikes. It's about inflation expectations and term premium. Luna: And what's happening with inflation expectations? Because the ten-year breakeven rate is sitting at two point two four percent — basically unchanged from last week. Lucas: Exactly. The breakeven hasn't spiked. That tells us the market isn't suddenly expecting runaway inflation. But core CPI is still running at three hundred thirty-six point one on the index — up from three thirty-five point four two a month ago. Sticky, not accelerating. And real GDP growth is at two point one percent annualized — decent but not booming. Luna: So if it's not inflation expectations running wild, what's pushing yields up? Lucas: The biggest factor is term premium. That's the extra compensation investors demand for holding longer-dated bonds, beyond just the expected path of short-term rates. And it's rising because of uncertainty around Treasury supply, fiscal deficits, and the global demand for US debt. Luna: I've seen some analysts point to the fact that foreign buyers — especially Japan and China — have been less aggressive in buying Treasuries this year. Could that be part of it? Lucas: It's definitely a factor. There's been a structural shift. Japan's own yields have risen, making US Treasuries relatively less attractive after hedging costs. And China's been diversifying reserves. So the bid from abroad isn't as strong as it was a decade ago. Luna: Meanwhile, the Treasury has to keep issuing. The deficit isn't shrinking anytime soon. Lucas: Right. The Treasury issuance calendar is heavy. And the market is absorbing it, but at a higher price — meaning higher yields. There's also an interesting parallel with what's happening in Europe. The ECB is signaling they might exit sooner than expected, which is pushing up bund yields. That's kind of dragging US yields along. Luna: Christine Lagarde leaving the door open to an early exit, combined with the political uncertainty in France — that's got European bond markets on edge. Lucas: And when bund yields rise, it creates a floor under US yields because global investors compare across markets. So we're seeing this synchronized move higher, even though the underlying drivers are a bit different on each side of the Atlantic. Luna: So for the average listener who's not a bond trader, what does a ten-year yield above four point five percent actually mean? Lucas: First, mortgage rates. The thirty-year fixed rate mortgage tends to track the ten-year yield. So if yields stay elevated, mortgage rates are going to stay in the high sixes or even seven percent range. That puts pressure on housing affordability. Luna: And it makes it harder for the Fed to cut rates, because lower mortgage rates could reignite housing demand and push inflation back up. Lucas: Exactly. The Fed is in a bind. The unemployment rate ticked down to four point two percent in June, and payrolls grew by only fifty-seven thousand — so the labor market is cooling but not collapsing. Core inflation is sticky. The Fed's likely on hold for a while. Luna: And the market is pricing that in. The two-year yield is at three point six nine percent, which is basically unchanged on the week. That suggests the market thinks the Fed stays put. Lucas: So the yield curve is flattening again — the gap between the two-year and ten-year is about eighty-eight basis points. That's not inverted anymore, but it's not steep either. It's kind of a 'no signal' signal. Luna: We've talked before about how the uninversion was supposed to be a warning. Now it's just... confusing. Lucas: Yeah, the curve normalized in a way that didn't lead to a recession — at least not yet. But now it's flattening again, which could mean the bond market is betting on slower growth ahead, even though inflation is sticky. That's a stagflationary vibe, if you want to use the term. Luna: And the stock market? The S&P 500 is at seven thousand five hundred seventy-five, up half a percent on the week. So equities seem to be shrugging it off. Lucas: For now. But if yields keep grinding higher, the discount rate on future earnings gets higher, which puts pressure on valuations — especially for the long-duration tech stocks that have led the rally. We've already seen the Nasdaq outperform the Dow this week, but that could reverse if yields break higher. Luna: Speaking of breaking higher, what's your yield target? Where does the ten-year go from here? Lucas: I think we could test four point seven five percent in the next few weeks if the data doesn't soften. But if we get a weak CPI print next month, we could easily drop back to four point three. The market is very data-dependent right now. Luna: So we're in a 'wait and see' mode. Lucas: Exactly. And that's the frustrating thing for investors. There's no clear direction until we get more clarity on inflation and the labor market. But one thing is clear: the era of ultra-low bond yields is over. A ten-year yield at four point five percent is the new normal. Luna: And that changes a lot of things — from retirement portfolios to corporate borrowing to government debt service. Lucas: It really does. And honestly, that's why we love talking about this stuff. The bond market is where the economy's real story plays out. Luna: And it's why we keep doing this show ad-free — so we can dive into the nuance without someone interrupting to sell you a mattress. Lucas: Right. We don't run ads on these episodes, and we'd like to keep it that way. If you find the macro conversation valuable, you can support the show at buy me a coffee dot com slash fexingo. It's a simple way to help us stay independent. Luna: Yeah, every little bit helps. And it lets us keep doing deep dives into stuff like term premium and yield curve dynamics. Lucas: Exactly. So, back to the bond market — one more thing I want to flag. The rise in real yields, that is, the ten-year yield minus breakeven inflation, is now around two point three three percent. That's the highest since 2007. Luna: That's a pretty restrictive level for the economy. Lucas: It is. Real yields that high act like a tightening in financial conditions, even if the Fed doesn't move. It makes borrowing more expensive for companies and households. And it could eventually weigh on growth. Luna: So the bond market is doing the Fed's work for them. Lucas: In a way, yes. And that might be why the Fed is comfortable staying on hold. They don't need to hike if the market is tightening conditions on its own. Luna: But if growth does slow, the Fed might have to cut — even if inflation hasn't come down to target. Lucas: That would be a tough call. They'd have to choose between supporting growth and fighting inflation. But for now, they're in a nice waiting pattern. Luna: Alright, let's keep an eye on the auction next week. The Treasury is selling twenty billion in twenty-year bonds. That'll be a real test of demand. Lucas: Absolutely. If that auction goes poorly, we could see yields spike again. If it goes well, maybe we get a little relief. Either way, we'll be watching. Luna: Thanks for joining us on The Macro Memo. Lucas: See you next time.