"US High Interest Rates to Continue... 10-Year Treasury Yield Rises Amid 'Bear Steepening'"

In the United States, a rapid rise in long-term interest rates, known as 'Bear steepening,' has been observed. This is a result of growing expectations that the high interest rate trend will continue for several years even after the tightening cycle ends, supported by a strong economy. Factors such as the Treasury Department's plan to expand bond issuance and the Bank of Japan's (BOJ) yield curve control (YCC) policy have also recently contributed to pushing up long-term interest rates.

[Image source=Getty Images Yonhap News]

The daily Wall Street Journal (WSJ) reported on the 6th (local time) that the benchmark 10-year U.S. Treasury yield surged to near its highest level in over a decade due to these effects. According to Tradeweb, the 10-year yield closed at 4.060% on Friday, the 4th. It showed a decline after a mixed-signal employment report in the morning but was still significantly higher compared to 3.968% a week earlier. At one point during the day, the 10-year yield surpassed 4.2%, approaching the 14-year high of 4.231% recorded last October.

However, short-term interest rate movements have been mixed. The 2-year yield, which is sensitive to monetary policy, closed at 4.791% on the 4th, down from 4.895% a week earlier. This suggests that the market expects the Federal Reserve's rate hike cycle to end soon. WSJ stated, "Recently, bond prices have fallen (bond yields have risen), and long-term rates are rising faster than short-term rates. This pattern is exactly bear steepening," adding, "Due to bear steepening trades, the 10-year Treasury yield has risen to levels near a decade high."

Just a few months ago, the rise in short-term rates was much more pronounced in the New York bond market. This was due to concerns that a recession would soon hit as the Fed continued its aggressive tightening to lower inflation. However, despite the persistent inversion between short- and long-term rates, WSJ diagnoses that the situation is now changing. Signals from the Fed that rate hikes are nearing their end have recently supported short-term Treasuries. Additionally, easing recession fears have encouraged selling of long-term Treasuries, the outlet added.

WSJ analyzed, "Investors are confident that high interest rates will persist," and "The expansion of soft-landing bets suggests that the U.S. economy can withstand higher rates than investors had anticipated." Jim Curran, Chief Investment Officer of the Portfolio Solutions Group at Morgan Stanley Investment Management, explained, "The inversion between short- and long-term Treasury yields that we have observed for a long time was based on concerns about a hard landing and the assumption that holding long-term Treasuries was safe," adding, "Now the market is saying, if not a hard landing, why would I want to hold 10-year Treasuries?"

The recent rise in long-term rates is not only due to solid economic indicators and soft-landing expectations. The U.S. Treasury has decided to increase the issuance of long-term bonds in the third quarter compared to previous plans. When bond supply increases, prices fall. Bond prices and yields move inversely. Earlier, the BOJ's policy adjustment to allow long-term Treasury yield fluctuations up to 1% also had an impact. There are concerns that Japanese investors, who hold a significant amount of U.S. Treasuries, might shift their investments to domestic bonds.

WSJ pointed out that the key question for investors now is whether the short-term rate set by the Fed will fall from the current 5.5% to the 2010s peak of 2.5%, or if the situation will resemble the 1990s when rates remained persistently high. Zack Griffiths, Chief Strategist at CreditSights, focused on similarities with the 1990s.

Some also noted that market conditions could change suddenly at any time. Matt Smith, Investment Director at Ruffer, said, "All recessions and economic downturns are a kind of 'Slowly-then-suddenly' phenomenon." This refers to situations where gradual accumulations suddenly manifest as significant changes or shocks at a certain point.

This content was produced with the assistance of AI translation services.