Will 30-Year US Treasury Yields Climb Higher?

Summary

• Middle East tensions are influencing Federal Reserve rate hike timing, the ultimate policy rate level, and pressure on long-term Treasury yields.
• German and Japanese yields have risen due to a higher policy path, investor demands for compensation on long-term bonds, and uncertainty regarding debt absorption.
• The Federal Open Market Committee coalesced around hiking rates twice this year, with the first hike occurring in September and the second likely in October or December.
• The committee indicated the rate increase aims to remove accommodation, signaling the policy rate is not yet in restrictive territory.
• The rate hike responds to inflation running above the Fed's target for years, while the employment mandate has largely been met.
• The Fed formally separated short-term yields from long-term yields, stating it will not police the long bond.
• Long-term yields must attract pensions and insurers to set their own levels rather than being determined by the committee.
• US debt-to-GDP ratio deterioration is estimated at around 1% per year, described as a drift rather than a spiral.
• Strong nominal growth can help stabilize the debt-to-GDP ratio, but market absorption of new Treasury issuance remains a separate issue.
• 30-year Treasury yields of 5.5% or higher are historically cheap in real, inflation-adjusted terms.
• There is no clear catalyst for 30-year Treasuries to rally amid heavy supply, uncertain inflation, & cautious institutional buyers.
• Longer-term Treasuries typically yield 50 to 100 basis points less than nominal GDP growth, with scope for 30-year yields to drop to 4.25%.
• Yields are unlikely to fall back to 3% without a recession or genuine growth shock.