We’ve also seen a significant rise in the yield for the 2-year bond. The 2-year yield is considered a proxy for the eventual direction of the all-important fed funds rate.
The 30-year Treasury bond yield (not shown above) recently reached its highest level since 2007, according to Bloomberg.
Why are yields rising?
- Markets believe that the Federal Reserve will eventually be forced to raise interest rates.
- The reason: the rate of inflation is rising.
- In addition, the economy has been more resilient than many had expected.
- Consumer spending has held up in the face of higher gasoline prices (at least so far).
- Business investment has soared amid the build-out of AI data centers. In the short run, that increases the demand for resources, which may be putting upward pressure on prices at a time when oil and other commodities have risen in price.
In the absence of an immediate increase in the fed funds rate (unlikely), the bond market is tightening financial conditions by pushing bond yields higher.
Earlier in the year, however, there were expectations that the Fed might cut rates later in the year.
Incoming Fed Chairman Kevin Warsh has said he favors lowering the fed funds rate. He has also advocated numerous changes at the Fed.
But he’ll have to persuade skeptical Fed officials that have put the possibility of a rate increase (or increases) on the table, according to the minutes released from the April Fed meeting. Stay tuned.
Finally, this Memorial Day, we take the time to honor those who gave their lives in service for our nation, remembering that our freedoms are an enduring legacy of their sacrifice.
