Disruptions to the global economic order, the prospect of higher inflation and rising unfunded government spending are pushing U.S. interest rates higher.
The yield on the benchmark 10-year Treasury note, which was less than 4.0% in late November, briefly hit 4.3% on Wednesday.
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This increase comes at a time when expectations are for the Federal Reserve to continue lowering its policy rate as the economy deals with a slowing labor market.
What is pushing 10-year yields higher is the term premium, which is the compensation investors require for holding a bond until its maturity.
Modeling by the economists Tobias Adrian, Richard K. Crump and Emanuel Moench at the Federal Reserve shows the term premium turning positive in early November and increasing to more than 0.7 percentage points in January.
This rise conforms with expectations of higher levels of debt, a weaker dollar and increased caution for investment in U.S. assets. All of those factors are contributing to the Fed’s being less able to counter lingering inflation.
The takeaway
While many investors have focused on political events over the past several days, leading to gyrating equity prices, the bond market has continued the selloff that began in November as the term premium has increased.
