By Vishwanath Tirupattur, global head of Quantitative Research at Morgan Stanley
The gruelling sell-off in US Treasuries that began in the summer has continued this week, most notably in the longer end of the yield curve. The 10-year Treasury yield got within spitting distance of 5% on Thursday, a level not seen since 2007 and an increase of about 125bp since the July trough. Almost all of this move higher in the 10-year yield has occurred in real yields. A widely followed model of term premiums from the New York Fed shows that an expansion of term premiums fully accounts for the rise.
Explanations for the rise in long-end yields as well as the expansion of term premiums abound, ranging from technicals (e.g., a demand-supply imbalance in the Treasury market), to selling by momentum-based investors such as commodity trading advisors (CTAs), to fundamentals (fiscal sustainability concerns, stronger-than-expected growth). While these factors may have contributed to the rise in yields on the margin, Morgan Stanley macro strategists Matt Hornbach and Guneet Dhingra have argued that the Fed’s hawkish reaction function provides a fuller explanation. Two things stood out in the FOMC’s most recent dot-plot:
