Long-term interest rates are rising once again, with 10-year Treasury yields approaching 4.4% and the 30-year testing 5.0%.
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A historic supply shock amid expansionary fiscal policies and what will be a significant increase in defense spending are contributing to concerns around inflation and the sustainability of the American fiscal position.
Rates, as a result, are being pushed higher along the long end of the maturity spectrum.
The decomposition of 10-year yields now shows rising expectations for increased short-term interest rates, and a rising term premium, which is compensation for holding bonds should monetary policy tighten more than expected.
In short, these are the ingredients of a potential bond market selloff should events worsen.
The takeaway
Both 30-year and 10-year bond yields are trading at the top of recent ranges, suggesting uncertainty and a greater risk in holding long-term securities.
That implies a higher cost of capital and slower economic growth coming out of the increased risk of higher inflation as the global economy deals with the supply shock.
