On a day devoid of any major market-moving news, investors sent yields in the roughly $25 trillion Treasury market closer to or further above 5% on Wednesday.
It isn’t the level of yields that may prove to be problematic as much as it is the speed with which they got there, with the pace only accelerating since the Federal Reserve’s policy announcement last Wednesday, analysts said.
One of the biggest factors that is sending long-term Treasury yields to multi-year highs is a recalculation of what’s known as term premium, or compensation that investors demand for the risk of holding a bond over the life of that security, according to Alex Pelle, an economist at Mizuho Securities in New York. Unlike the risk of holding cash, which is seen as limited, the same can’t necessarily be said for long-term government debt.
The move toward 5% Treasury yields “is not all a bad thing if it is an endorsement of the structurally higher growth environment we’re in, in which the economy is fundamentally more resilient than in the past,” he said. “But the other part of this is more negative, with investors worried about the trajectory of government debt and a huge deficit, plus the Fed’s quantitative-tightening effort.”
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