US economy

Treasury yield surge: one for the record books?


With the US Treasury market shut on Monday, investors had an opportunity to catch their breath following the sharp sell-off of recent weeks that has driven yields to multiyear highs.

And what a breath it needs to be, given investors are now staring down one of the biggest advances in yields of the past decade.

The yield on the benchmark 10-year US Treasury finished at 3.2338 per cent on October 5, its highest level since May 2011. This came in the wake of labour market data that showed the national unemployment rate falling to its lowest level since 1969. The report, which underscores the strength of the US economy, should keep the Federal Reserve on track for another interest rate rise this year.

A rate rise this quarter would be the Fed’s fourth tightening in 2018, and it is eyeing three more next year.

So far in 2018, the yield on the 10-year has risen by 82.73 basis points — from 2.4054 per cent at the end of 2017. In the past decade, only 2009 and 2013 had seen a larger rise in yields over the same period.

In calendar 2009, the yield on the 10-year rose 1.62 percentage points (162.45 bps) to finish that year at 3.8368 per cent, while in 2013, the yield rose 1.27 percentage points to 3.0282 per cent. Yields fell in each of the subsequent years, and it is worth remembering neither of those periods were against the backdrop of the Federal Reserve actually raising interest rates, as is the case in 2018. Rather, the Fed was buying bonds via its vast asset purchase programme and trying to drive borrowing costs lower to spur lending and economic growth.

Over the past 30 years, only 1994, 1999 and 1996 — in addition to 2009 and 2013 — had seen a larger increase in the 10-year yield by this point in the year than 2018 has. Those years are the top five calendar year rises in yields over the past three decades.

As benchmark interest rates have risen, so too have home loan rates. The 30-year mortgage rate has risen 76 basis points so far this year to 4.71 per cent, the first — and also biggest — rise since 2013.

Rising mortgage rates are seen by analysts as one reason the housing market is one of the weaker parts of the otherwise solid picture of the US economy. Strong demand for tight supply of housing in some areas is also pricing out some potential homebuyers.



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