The 10-year Treasury yield hit levels not seen since before the Great Recession on Wednesday, extending a run in which it climbed five of the past six weeks. Let's look at that's pushing yields up so quickly.
The benchmark 10-year yield hit an intraday high of 4.927% on Wednesday. That's the highest intraday level since July 25, 2007, when it topped at 4.945%, according to Dow Jones Market Data.
That's a far cry from its 0.5% low in August 2020. The 10-year yield started accelerating from 3.3% in April and is causing concern for investors.
The economy has remained resilient as seen by numerous economic reports. Tuesday's September retail sales data was an example of the economy outperforming expectations.
That's made traders believe the Federal Reserve is prepared to keep interest rates higher for longer, even as some Fed officials soften their views on monetary policy.
"Rates may have some room to move higher, but we believe most of the upward push in yields is behind us, if our expected recession is around the corner," Wells Fargo Senior Global Market Strategist Scott Wren noted.
Treasury Yields Rise As Government Spends
Another factor pushing up yields is a growing federal budget deficit, which is expected to top $1.7 trillion though the fiscal year that ended in September, according to a Charles Schwab projection.
The federal debt sits at $33 trillion. Federal debt is growing faster than GDP and keeps increasing as the government is forced to pay more for its borrowing, Schwab Chief Investment Strategist Liz Ann Sonders said in the report.
"In addition, the Fed is now reducing its holdings of Treasury securities with its quantitative tightening (QT) program; while foreign investors, U.S. banks and state/local governments are reducing their holdings," Sonders added.
The government is about to issue a lot more short-term debt to fund its ongoing spending habit, Wells Fargo's Wren said.
Investors are requiring higher rates on longer-term bonds versus short-term bonds as they tie up their money for longer. This is pushing up net interest expense. The interest expense on government debt as a percentage of GDP is more 2.8% and if it continues at the current pace, will exceed what the U.S. spends on defense.
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