US | Long-term yields keep facing upward pressure from term premia

Summary

A notable development in recent weeks has been the rise in the 30-year Treasury yield, likely driven by growing concerns over U.S. fiscal sustainability and reduced global appetite for U.S. Treasuries as bond investors want to be rewarded for higher risks.

Key points

• Key points:
• Easing recession concerns amid the recent de-escalation in trade tensions with China has led markets to adopt the view that there is “no hurry” to cut rates.
• Long-term yields have remained stubbornly elevated, with the 10-year Treasury yield averaging 4.4% so far this year—above last year’s 4.2% average.
• Usually, yield curve steepening during rate cut cycles signals improving growth prospects; this time is driven by rising term premia, reflecting heightened concerns rather than optimism.
• A sudden loss of the U.S. dollar’s dominance remains unlikely, but rising risk compensation demanded by investors could shift the global equilibrium of real rates higher.
• Despite continued pessimism in consumer and business sentiment surveys, market-based measures of long-term inflation expectations remain well anchored.

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