According to a WSJ report, the yield on the 10-year U.S. Treasury note hit a 15-year high since June 2008. The 10-year treasury yield hit the record low of 0.52% in mid-2020 when QE was in full force. But we are in a very different world right now. There’s more supply than demand for the long-term treasuries. The US government is borrowing a lot more money to fund deficits but the appetite for the long-term treasuries seem to be waning. The Fed is no longer buying due to QT. Foreign buyers like China, Japan and Saudi Arabia are also retreating. I believe there is still some retail demand but as a retail investor myself, I prefer treasury bills as the interest rate is higher and I don’t feel like taking interest risks right now. However, I will consider locking in 5% if the yield keeps rising. The 10-year treasury yield is market driven (as opposed to being determined by the Fed) and the market is pointing to higher yield due to higher supply and lower demand.
10-year Treasury yield is an important benchmark representing risk free returns. If investors can get a 5% risk-free return with 2% inflation and obtain a 3% real return without lifting a finger, why take so much risk in other asset classes? The mortgage interest rate is also typically priced about 2-3 percentage points higher than the 10-year Treasury yield. It’s entirely likely that the 7-8% mortgage rates we have right now will be normalized and home affordability will continue to be an issue down the road unless there’s a reset on home prices.
You can literally hear the slurping sound of liquidity being drained from the financial system.
This ends when US government moves some a 7% deficit to a balanced budget/austerity. Similar to what happened in Britain last year.
An interim step, applied in the 70s, and in Britan recently, and similar to the BTFP program is to "temporarily" buy bonds to try and dampen volatility. The fed intervenes when things get to volatile, they know that they can't put a ceiling on yields or it creates an inflation spiral which ends in loss of reserve currency status.
There would be a cap on amount of purchases and they would then get resold over time as part of the QT program. This keeps inflation higher for longer without austerity and likely creates panic selling hence why austerity is needed.
This is a really bad situation. It definitely means hard landing.
If you can't find the full version of the summary below feel free to email and I'll share it. Have a look at ccc liqudity and worsening debt serviceability. Higher for longer is going to result in many bankruptcies (layoffs).
https://apolloacademy.com/credit-market-outlook-5/