The yield on the 30-year U.S. Treasury bond crossed 5% on Monday, briefly settling near 5.02% before easing slightly. It marked the latest test of a level the long bond has flirted with repeatedly since October 2023, and one few imagined revisiting outside of the post-pandemic adjustment. The drivers are stacking on top of one another rather than offsetting.
Inflation has stopped cooperating. The March CPI rose 3.3% year-over-year, a two-year high, with prices running well above the Fed's 2% target more than four years on. The recent Iran conflict has compounded the picture, as crude oil has surged on supply risks tied to the Strait of Hormuz and lifted the inflation outlook investors price into long-dated bonds.
The Fed has shifted as well. Three of twelve voting officials recently dissented against easing language, and rate-hike discussions have re-entered the conversation. Swap markets are now pricing in some probability of hikes resuming in 2027 or 2028, a meaningful change for a market that had assumed a steady cutting cycle.
Then there is supply. The Treasury sold $723 billion of securities in a single week. With deficits projected near 7.9% of GDP and federal debt held by the public above 100% of GDP, investors are demanding a higher term premium to fund a government issuing record amounts of paper. That extra compensation for long-duration risk shows up most clearly in the 30-year.
The combination matters. Higher long yields raise mortgage rates (now near 6.30%), corporate borrowing costs, and federal interest expense, which in turn worsens the deficit picture that helped lift yields in the first place. Past 5% tests have been followed by sharp reversals, but each successive test has produced smaller pullbacks, suggesting the market may be repricing rather than overshooting.
Sources: Bloomberg, CNBC, DoubleLine, Federal Reserve, Federal Reserve Bank of St. Louis
This material is for informational purposes only and not intended as investment, tax, or legal advice. Past performance is not indicative of future results. Projections or trends discussed are not guarantees. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing. The (CMO, mutual fund, etc.) is backed by the full faith and credit of the US Government as to the timely payment of principal and interest. The principal value will fluctuate with changes in market conditions. If they are not held to maturity, they may be worth more or less than their original value. The return and principal value of bonds fluctuate with changes in market conditions.