On Monday, the benchmark 10-year US Treasury note yield surpassed the 5.0% mark, a level not seen since July 2007. This followed a recent attempt to breach this milestone the prior week. The surge in long-term bond yields ensued after Federal Reserve Chair Jerome Powell indicated that the robust state of the economy and a tight labor market might necessitate more stringent financial conditions.
Monday’s market activity witnessed yields spiking to 5.012%, marking an uptick of nearly 9 basis points from the preceding day. This ascent briefly grazed the 16-year peak of 5.001% registered last Thursday. Analysts attributed this swift escalation to investor expectations of an even more robust US economy, coupled with potential fiscal slack from the government.
The surge in Treasury borrowing costs can be attributed to a divided Congress engaged in deliberations over the year’s spending bills. Concurrently, the Federal Reserve has been gradually diminishing its bond holdings. In a fiscal report, the US government disclosed a staggering $1.695 trillion budget deficit for the year ending September 2023, reflecting a notable 23% surge from the preceding year. This stands as the largest deficit since the debt accrued during the COVID-19 pandemic in 2021.
President Joe Biden has called upon Congress to authorize an additional $100 billion for foreign aid and security expenditures. This includes an allocation of $60 billion for Ukraine, $14 billion for Israel, along with funding earmarked for border security and the Indo-Pacific region.
Addressing the surge in government borrowing, Kyle Rodda, Senior Financial Markets Analyst at Capital.com, stated, “It’s a major milestone, the fact the entire curve is at or above 5%. Debate rages about what this means and what’s driving the dynamic. Of course, it’s some combination of strong growth, high issuance, and quantitative tightening.”
The yield on the two-year US Treasury experienced a 4 basis point increase, reaching 5.125%. Meanwhile, the 30-year yield saw an 8 basis point rise, culminating at 5.164%. The relentless climb in US bond borrowing costs suggests a trajectory poised to reach levels not seen since July 2007.
The recent surge in the US Treasury note yield above the 5% threshold signifies a pivotal moment in the financial landscape, prompting a closer examination of its potential impact on the broader economic outlook and market dynamics.