id: 31f409ff-855c-070c-abc3-6c05da82eb7b
Why are US 10-year Treasury yields soaring? - Huxiu.com#
Omnivore#
Highlights#
Since the rise in long-term interest rates is not due to a strong economy but to an increase in term premiums, the need for further rate hikes may be reduced. ⤴️ ^c932a19a
The real economy has fallen below the threshold, creating tight financial conditions, resulting in an increase in term premiums. ⤴️ ^d3cfcf06
Creating tight financial conditions. ⤴️ ^b1c6b097
Why are US 10-year Treasury yields soaring?#
Last night, Dallas Fed President Logan made a speech:
-
If long-term interest rates remain high due to an increase in term premiums, the need for further rate hikes may be reduced. However, if a strong economy is the reason for the rise in long-term interest rates, the FOMC may need to take more action.
-
Recent inflation developments are encouraging, but it is still too early to be confident that inflation will reach 2% in a sustainable and timely manner. The labor market remains very strong, with output, spending, and employment growth exceeding expectations.
-
It is necessary to maintain tight financial conditions in order to restore price stability in a sustainable and timely manner.
-
They will continue to monitor two key risks within their mandate, with high inflation remaining the most important risk, and they will not allow it to become entrenched or reignite.
As a result, there has been a significant restoration of US dollar liquidity, and 10-year Treasury yields, gold, and US stocks have all performed well.
- 10-year Treasury yields:
- Gold:
- US stocks:
Why did the market react so strongly to Logan's speech? This requires us to put it into a specific historical context and understand it with an appropriate theoretical framework.
I. Why are US 10-year Treasury yields soaring?
In the article "The Impact of US Dollar Liquidity Shocks in the Early Stages of Economic Recession", we constructed a framework to explain the two reasons for the tightening of US dollar liquidity:
-
The increase in the federal funds rate;
-
The decline in the strength of the real economy.
The first factor is well-known, but the second factor is counterintuitive because it requires specific historical conditions - the end of a rate hike cycle.
Understanding this historical background and the related theory, it is not difficult to understand Logan's complicated words:
If long-term interest rates remain high due to an increase in term premiums, the need for further rate hikes may be reduced. However, if a strong economy is the reason for the rise in long-term interest rates, the FOMC may need to take more action.
It is obvious that the current rise in 10-year Treasury yields is due to the rapid increase in term premiums, not a strong economy.
Therefore, Logan's actual meaning is: since the rise in long-term interest rates is not due to a strong economy but to an increase in term premiums, the need for further rate hikes may be reduced.
So, what factors have led to the increase in term premiums? In fact, her subsequent text provides a hint:
In order to restore price stability in a sustainable and timely manner, it is necessary to maintain tight financial conditions. In simple terms, the real economy has fallen below the threshold, creating tight financial conditions, resulting in an increase in term premiums.
Through the entire framework, we can know the following points:
-
Only when the term spread is high enough, financial conditions are tight;
-
In the case of a strong economy, rate hikes may not immediately tighten financial conditions;
-
The Fed does not know how long to maintain tightening, but they will make decisions opportunistically.
II. Adjustment of rate hike expectations
At the September interest rate meeting, the Fed provided an extremely hawkish dot plot:
This dot plot suggests that there will only be two rate cuts next year. In other words, the Fed's official guidance was 5.22%:
ps: Rate cuts will start in November next year, and the corresponding 2-year Treasury yield for this path is 5.22%.
In the article "How to Track US Monetary Policy and Economic Expectations?", we discussed related issues.
Logan's speech this time is equivalent to removing the rate hike at the end of the year based on the September dot plot. As a result, the Fed's official guidance has been lowered to 4.94%.
According to the framework of this article, the capital market will adjust based on the Fed's guidance to express its own views on economic expectations.
This time, the market did not make any adjustments and directly voted in favor, keeping the actual price of the 2-year Treasury yield around 4.95%.
III. Conclusion
In summary, the latest rate hike expectations have been revised as follows: a) no rate hikes in the next three meetings; b) the peak position is 5.5%; c) rate cuts will start in November 2024; d) each rate cut will be 25 basis points.
In addition, through Logan's speech, we can easily understand one thing: the Fed has always known what its real purpose is: to create tight financial conditions.
In a price-guided monetary system, achieving this condition requires two supports: 1. The federal funds rate is high enough; 2. The strength of the economy is not too strong.
Compared to the former, the latter is more crucial. However, the Fed still needs to pay attention to its way of expression and methods, so their usual rhetoric is:
Recent inflation developments are encouraging, but it is still too early to be confident that inflation will reach 2% in a sustainable and timely manner. The labor market remains very strong, with output, spending, and employment growth exceeding expectations.
What they say is one thing, but what they really want is another.
Of course, the recent Israeli-Palestinian conflict has also contributed to this issue, and we need to note that: US stocks are rising, so liquidity factors are still the main contradiction.
This content represents the author's independent views and does not represent the position of Huxiu.com. Reproduction without permission is prohibited. For authorization, please contact hezuo@huxiu.com
If you have any objections or complaints about this article, please contact tougao@huxiu.com
People who are changing and want to change the world are all on the Huxiu APP.