The 10-year Treasury yield ended Friday at 4.21%, down from an intraday high of 4.32%, following this WSJ article. The piece may have been interpreted as indicating a Fed ‘pivot’. Whatever signal the WSJ article meant to convey, the market reaction was telling. The 10-year Treasury yield dipped, but the yield on the 30-year UST rose 9 bps to 4.33%, the highest since July 7th, 2011.
The long end of the curve is reacting (negatively) to the idea of a Fed pivot. This may have implications for 10-year Treasury yields too. If the Fed pivots, risk premiums may simply rise to prevent a big rally across medium and long-dated Treasuries. In short, the bond market is in charge.
The question of valuation has once again been brought to the fore after years of QE depressing yields. It is no longer reasonable to expect negative real yields, with ongoing QT and rate hikes. The 12-month moving total for the Federal budget deficit is now widening again in the US. The debt-to-GDP ratio is set to rise to 110% by the end of 2032: with the US and China decoupling (and the potential hit to demand for USTs this would entail), valuations for Treasuries may continue to look rich.
Bond markets have had their say in the UK, ejecting the Chancellor and then the Prime Minister. The new favourite to become PM, Rishi Sunak, may lift Gilts, helping them trade at a premium to US Treasuries, if he embarks on the politically difficult path of austerity.
The bond markets are challenging Japan’s policy makers too. This week will represent the biggest test yet for the BoJ and the MoF, with the release of the Tokyo CPI on Friday. The y/y for the SRI-Hitotsubashi Consumer-purchase Price Index (ex-cigarettes) surged to a new high of 3.97% in the week beginning October 10th.
