Kelsey Berro, fixed income executive director at JPMorgan Asset Management, suggests that bond yields can fall under certain conditions, specifically in response to good news from the oil markets or unfavorable economic data. This perspective highlights that the Federal Reserve's policy is no longer the sole determinant of bond yields, an idea corroborated by recent analysis from JPMorgan.
JPMorgan notes that alongside Fed policy, U.S. economic resilience, demand for capital, competitive fundraising, and rising energy prices are now equally significant factors influencing bond yields. While real interest rates are increasing, the stock market remains resilient due to strong corporate earnings and robust economic growth. However, this equilibrium may become challenging to maintain if real rates continue their upward trend.
Energy prices, particularly for refined products like diesel and jet fuel, have been identified as a key driver of bond yields. For instance, the U.S. 30-year yield rose over 20 basis points since the July FOMC meeting, coinciding with Brent crude rising approximately 13%. An attack on Saudi Arabia's East-West pipeline, which disrupted crude deliveries to Europe, has added pressure to already tight diesel markets, further contributing to the complexity of the oil market outlook.
The bank also indicates that the greater driver of higher yields since the July Federal Open Market Committee (FOMC) meeting has been an increase in the term premium—the extra compensation investors demand for holding longer-dated government debt amidst uncertainty—followed by robust economic activity. Upward pressure from explicitly hawkish monetary policy has not been a primary factor, contrary to some media narratives.
Berro previously stated that investors do not require aggressive rate cuts from the Fed to achieve bullish returns in bonds, reinforcing the idea that other market forces are at play. This broader set of forces, including energy markets and term premiums, suggests that bond yields are responding to more than just the trajectory of Fed rate adjustments.
