3 Key Reasons Why U.S. Treasury Yields Continue to Surge

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Since the Federal Reserve’s two rate cuts and the release of its most recent Summary of Economic Projections (SEP) on September 18, the yield on the U.S. 10-year Treasury note has climbed sharply, increasing by 80 basis points over the past two months, moving from roughly 3.7% to around 4.5%.

What factors are driving this significant rise in Treasury yields? We identify 3 key reasons behind this trend.

1. Market Overestimation of Rate Cuts

Earlier, the market was more optimistic about rate cuts, generally expecting that a potential recession in the U.S. would prompt the Fed to lower rates by over 11 cuts in this cycle. As a result, the 10-year Treasury yield declined to around 3.65% between July and September.

However, the SEP released on September 18 indicated that rate cuts may only total approximately 10 basis points in this cycle, with the Fed expressing confidence in managing inflation and stabilizing the labor market. This shift led the market to recalibrate expectations, pushing the 10-year Treasury yield up by 20 basis points to around 3.85%—a key initial factor behind the rise in yields.

(Source: Fed – FOMC participants’ assessments of appropriate monetary policy)

2. Stronger-than-Expected Economic Data

At the Fed’s meetings in July and September, the emphasis shifted from inflation to the labor market, with the market trading Treasuries based on the notion that “a deteriorating labor market could trigger a recession in the U.S.”

Employment Data Exceeds Expectations

However, unexpectedly, the employment data released on October 4 significantly exceeded market expectations. Non-farm payrolls for September saw a substantial increase, and the unemployment rate declined once again. Although October’s non-farm payroll data showed a sharp drop, this was primarily due to temporary impacts from hurricanes and strikes.

The ADP data indicates that the job market remains robust, which has led the market to raise its interest rate expectations again. As of November 1, the U.S. 10-year Treasury yield has risen to approximately 4.38%.

(Source: CME – FedWatch, TrendForce)

Consumer Confidence Rises

Additionally, recent data on retail sales and GDP have highlighted robust consumer spending, with consumer confidence also climbing steadily. These indicators underscore the resilience of the U.S. economy, contributing to the recent rise in Treasury yields.

3. Potential Debt Expansion in Coming Years

Although the U.S. Treasury announced on October 30 that the size of long-term debt auctions would remain unchanged, and the Treasury Secretary stated that there would be no increase in the coming quarters, concerns remain.

Given that Donald Trump, the presumptive 47th President of the United States, has not addressed fiscal deficit reduction in his campaign policies, an increase in U.S. debt levels appears unavoidable. This has been a key factor driving the recent rise in Treasury yields.

If economic data continue to demonstrate resilience, the Federal Reserve’s capacity to lower rates could remain limited.

Additionally, while the Treasury intends to maintain current issuance levels in the near term, the lack of deficit reduction emphasis among political candidates suggests persistent risks of fiscal expansion.

Together, these elements are expected to place additional upward pressure on U.S. Treasury yields.

Reference
< href=”https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20240918.pdf” target=”_blank” rel=”noopener noreferrer”>Summary of Economic Projections (SEP) on September 18
Quarterly Refunding Statement of Assistant Secretary for Financial Markets Josh Frost