Can the US 10-year Treasury yield, which recently surpassed 5%, continue its upward trend? There is growing analysis both inside and outside Wall Street suggesting that the global benchmark 10-year yield may have already peaked. Earlier, since both economic growth and inflation, which triggered the surge, are expected to slow down, it is anticipated that Treasury yields will find it difficult to rise further. Additionally, the US Treasury's decision to reduce the size of bond issuance in the fourth quarter of this year has reinforced this outlook.
On the 30th (local time), UBS released a report titled "Can the rise in Treasury yields continue?" forecasting that the 10-year yield will fall back to around 3.5% within 12 months. The report noted, "The global benchmark 10-year yield surpassed 5% in mid-October, marking the highest level since 2007," highlighting factors such as strong US growth, concerns over fiscal deficits, and term premiums related to those deficits as the background.
It also stated, "The most important factor driving future Treasury yield movements is the US growth outlook," adding, "As global growth slows and inflation eases, Treasury yields will settle at a long-term equilibrium level." The US third-quarter Gross Domestic Product (GDP) recorded an annualized 4.9% growth supported by strong consumer spending, but it is expected to slow to around 1% in the fourth quarter. Although slower than initially expected, core inflation is also continuing to ease.
UBS presented a baseline forecast of 3.5% for the 10-year yield within 12 months in this report, a level similar to that at the beginning of this year. At that time, there were concerns that accumulated tightening could lead to a recession as early as the second half of this year or next year. In the New York bond market this afternoon, the 10-year Treasury yield is hovering around 4.88%. The 30-year yield stands at 5.03%, and the 2-year yield, which is sensitive to monetary policy, is at 5.04%.
Katie Stockton, founder of Fairlead Strategies, appeared on CNBC's Squawk Box on the same day and suggested that Treasury yields may have already peaked. She said, "At least for now, I believe we have reached the peak," adding, "For the first time, as we move into November, some long-term indicators are about to show counter-trend signals." The daily Wall Street Journal (WSJ) also reported, "Investors are finally debating whether the 10-year yield has reached its peak." WSJ noted, "Some argue that the 10-year yield could rise to the level of the federal funds rate (5.25?5.5%)," but also added, "Since the Fed is expected to cut rates at some point, it may be difficult for yields to rise further."
The Treasury's borrowing plan for the fourth quarter, which was expected to impact the bond market, has been reduced more than anticipated. This afternoon, the Treasury announced plans to issue $776 billion in debt from October to December this year. This is significantly lower than the $1.01 trillion issued in the third quarter and also less than the $800 billion forecast by JP Morgan.
Until now, the market had expected a surge in Treasury issuance in the second half of the year due to concerns over the US fiscal deficit, which had led to rising Treasury yields. However, with the announcement of a smaller-than-expected issuance size, there are expectations that the recent sharp rise in Treasury yields will calm down.
The Treasury is scheduled to release a detailed report on November 1, outlining the specific size, duration, and timing of issuance. Jason Williams, strategist at Citigroup, said, "Everyone knows that large-scale funding is necessary. What matters is the issuance trend," emphasizing that the type of bonds issued is more important than the total borrowing amount.
The recent surge in Treasury yields is also expected to be a key topic at the Federal Open Market Committee (FOMC) meeting held from October 31 to November 1. With expectations leaning toward a rate pause, investors will likely seek hints about the direction of monetary policy after December during Fed Chair Jerome Powell's press conference. In particular, Powell's assessment of the rising Treasury yields, economic conditions, and inflation will be crucial.
On the same day, WSJ reported that the recent sharp rise in Treasury yields has confirmed effects equivalent to two to three rate hikes, suggesting that the Fed's rate increases may be coming to an end. According to Deutsche Bank, the rise in Treasury yields since September has tightened financial conditions enough to reduce next year's economic activity by 0.6 percentage points. Shamik Dhar, chief economist at BNY Mellon Investment Management, stated, "The bond market providing tightening conditions means the Fed can be more cautious."
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