The US Treasury market is experiencing an intensified sell-off, with 10-year yields rising to 5.20% (their highest since 2007) and 30-year yields reaching 5.48% (a post-2004 high). This increase is primarily attributed to rising real yields rather than inflation expectations, coupled with soft demand at recent Treasury auctions and growing signals of an accelerating US economy. The weak bid-to-cover ratio at the seven-year auction and declining indirect demand highlight investor reluctance to absorb Treasury supply.
Federal Reserve policy continues to lean hawkish, with pricing for a Fed rate hike in October reaching 70% and 57% for back-to-back hikes in October and December. New York Fed President John Williams has indicated that another rate hike may be appropriate by year-end. This "higher-for-longer" interest rate scenario is increasing pressure on growth stocks and risky assets, causing growth stocks to suffer, the US dollar to strengthen, and gold to decline.
Despite Treasury Secretary Scott Bessent's efforts to lower long-term yields through increased buybacks of long-dated debt, the fiscal deficit remains large, necessitating continuous borrowing. Analysts like Sonal Desai of Franklin Templeton Fixed Income argue that these buybacks merely reshuffle debt without reducing the overall borrowing requirement, thus failing to address the underlying issue of persistent upward pressure on yields. This environment of elevated government borrowing and financing for AI investments is expected to keep yields high, challenging the traditional role of duration as an equity hedge.
