【Macro in 2 Minutes】The Surge of Long-Term Yields of U.S. Treasuries

Summary

This video dives into the factors influencing US 10-year treasury yields, which have reached a 16-year high. Former Fed Chairman Ben Bernanke highlights three key components: break-even inflation rates, Treasury Inflation-Protected Securities (TIPS), and the ACM term premium estimates. The video explains how recent economic data, a slowing inflation growth, and changes in bond issuance have contributed to this rise in yields. It wraps up by examining whether the current rate hike cycle has ended and the economy's transition to moderate growth. Key indicators to watch for updates on US bonds are also shared.

Takeaways

• 😀 The US 10-year treasury yields have reached a 16-year high.
• 😀 Former Fed Chairman Ben Bernanke identified three main factors influencing US bond yields.
• 😀 The three key indicators affecting bond yields are: Break Even inflation rates, TIPS yields, and ACM term premium estimates.
• 😀 Break Even inflation rates reflect market expectations of inflation, which is currently steady at 2.5%.
• 😀 Treasury Inflation-Protected Securities (TIPS) offer insights into real interest rates, with TIPS yields rising above 2% recently.
• 😀 The recent economic data has outperformed expectations, contributing to a rise in TIPS yields, which impacts long-term bond yields.
• 😀 The ACM term premium estimate represents the return demanded by investors for holding long-term bonds.
• 😀 The Fed's continuous balance sheet reduction and increased issuance of long-term bonds have caused the ACM term premium to shift from negative to positive since July.
• 😀 The US economy shows resilience during the current rate hike cycle, which is an important factor influencing bond yields.
• 😀 To determine if the rate hike cycle has ended, two key aspects should be examined: a slowdown in treasury bond issuance and a shift to moderate economic growth.

Q & A

What is the current reason behind the rise in US 10-year treasury yields?

The rise in US 10-year treasury yields is primarily due to three key components: break-even inflation rates, Treasury Inflation-Protected Securities (TIPS), and the ACM term premium estimates.

What are break-even inflation rates and why are they important?

Break-even inflation rates reflect market expectations of future inflation. They are important because they indicate how much inflation the market anticipates, and currently, this rate is holding steady at around 2.5%.

How do TIPS provide insights into real interest rates?

TIPS offer insights into real interest rates because they are designed to protect investors from inflation. Recent economic data, showing better-than-expected performance, has led to TIPS yields rising above 2%, influencing long-term bond yields.

What is the significance of the ACM term premium estimate in relation to bond yields?

The ACM term premium estimate represents the return demanded by investors for holding long-term bonds. The term premium has risen as the Federal Reserve has reduced its balance sheet and the treasury has increased long-term bond issuance.

How has the US Federal Reserve's actions impacted the treasury bond market?

The Federal Reserve has been reducing its balance sheet, which has contributed to an increase in long-term bond yields, especially with the increased issuance of long-term bonds by the treasury.

What does the shift in the 10-year ACM model from negative to positive indicate?

The shift from negative to positive in the 10-year ACM model suggests that investor demand for long-term bonds has risen, signaling increased risk tolerance or expectations for future stability.

What is the current outlook for the US economy as we approach the end of the year?

The US economy is showing remarkable resilience, despite the ongoing rate hike cycle, which suggests that the economy has remained strong and is able to handle higher rates.

What factors will determine whether the rate hike cycle has ended?

Two key factors to watch are whether treasury bond issuance slows down and whether the economy transitions to a phase of moderate growth.

What role do long-term bond issuance patterns play in economic growth forecasts?

Changes in long-term bond issuance patterns provide insight into government borrowing strategies and investor confidence, which can signal broader economic conditions, such as growth or recession.

Why are the three indicators (break-even inflation rates, TIPS, and ACM term premium) crucial for understanding US bond trends?

These three indicators are crucial because they offer a comprehensive view of market expectations regarding inflation, real interest rates, and the required returns for holding long-term bonds, all of which influence the US bond market and treasury yields.