Perhaps the most striking (and surprising) development in the third quarter of 2023 was a significant rise in US real yields. The chart of the week shows just how far the 5-, 10- and 30-year benchmark yields have risen both since the Federal Reserve began tightening policy in March 2022, and in a broader historical context.
Our fixed-income team’s view, is that US Treasury nominal and real yields have likely overshot to the upside. Their assessment is that yields capitulated higher in recent weeks due to a combination of factors, including:
- Guidance from the Federal Open Market Committee in September that policy rates would be higher for longer, and that the US was now expected to avoid a recession.
- Concerns over larger-than anticipated fiscal deficits, leading to heavier longer-dated Treasury supply, as indicated in Treasury’s July Quarterly Refunding announcement.
- Already-stretched overweight duration positioning by asset managers who had positioned for a US recession in 2023;
- “Stop-outs” from a range of investors, particularly asset managers.
- Technical factors that forced a number of buyers to reduce the size of their positions. This downsizing of positions was amplified by the fall in bond prices.
The conditions for a topping out of yields may soon be at hand. Tighter monetary policy should start to make itself felt, slowing the US economy and encouraging flows out of other asset classes and into government bonds. Nonetheless, a period of consolidation and a decline in volatility is likely needed to attract buyers back in.
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