Long-term US Treasury yields are nearing multi-year highs buoyed by concerns about the US national debt.
The US Treasury 10-year Yield Index (TNX) climbed 11 basis points on Wednesday, a relatively large one-day move, returning to a buy signal when it broke a double top at 4.6%. Meanwhile, further out on the yield curve, the 30-year yield index (TYX) was up a little more than 12 bps and reached a new 2025 high when it hit 5.05%, which puts it roughly 10 basis points below the high it reached in 2023. The spike in yields followed weak demand in yesterday’s 20-year bond auction.
TYX and TNX are both now at or near levels that have proven to be strong resistance over the last couple of years, so it is possible we could see consolidation or a move lower from here. However, both indices' charts currently show long-term yields trending higher and, as we discussed in yesterday’s Point & Figure Pulse, long-term bonds have a weak technical picture.
Since 2023, when the Fed finished its tightening cycle, there seems to have been a general belief that long-term yields should eventually come down. But, like the technical picture, the current economic/fundamental conditions are potentially troublesome for the bond market. As we discussed on Monday, Moody’s downgraded the US’s credit rating on concerns about the growing national debt. While credit rating doesn’t have the same importance for the US Government that it does for other issuers – entities that are restricted to owning only AAA debt will still be able to hold US Treasuries and therefore the downgrade won’t cause an implicit drop in demand – the net effect of a lower credit rating is unlikely to be lower yields.
More important than credit rating is the cause of the downgrade – the national debt – which has been a concern for some time now. On Thursday, the House of Representatives passed a tax and spending bill which the Congressional Budget Office has estimate will add an additional $3.8 trillion to the debt over the next 10 years, which is likely to exacerbate those worries, potentially putting upward pressure on yields. The concern isn’t that the US will default on its debt, the government’s ability to tax and print money makes that a highly unlikely outcome. But imagine if the government created trillions of dollars to pay off its debt, those dollars would be worth less than when the debt was issued. This is an incredibly oversimplified scenario to be sure, but you can see why the growing national debt could push yields higher even if there aren’t serious concerns about a default.
Meanwhile, recent comments from FOMC members have indicated that they are in no hurry to lower the Fed funds rate. A month ago, the fed futures market was pricing in about a 68% chance that the Fed would lower rates by 25 bps at its June meeting. Those odds now stand at around 5% and the market isn’t pricing a better than 50% chance of a cut until September. While the Fed doesn’t directly control long-term rates, which is what bondholders are usually most concerned about, the short-term rates the Fed does control (and perhaps more importantly expectations about where they are headed) do have an indirect impact further out on the curve.
As with everything in this business, there are no guarantees. We can’t know for certain which way interest rates are headed, but what we can say is that from both economic/fundamental and technical perspectives there are reasons to steer clear of long duration bonds. It is also worth noting that, over the last few years, when the 10-year yield index has gotten above 4.5%, it has often been accompanied by weakness in US equities.
