A slow-motion breakout on long-dated Treasury yields is undermining investor confidence.
Long-dated Treasury yields reached their highest closing levels in well over a decade on Thursday, undermining investors’ confidence, injecting uncertainty in the stock market, and threatening the U.S. housing market.
Nicholas Colas, co-founder of DataTrek Research, said “the root cause” behind the U.S. government-debt market’s moves is higher real yields and that the 10-year Treasury yield could “easily reach” 4.5%-5%. Real yields reflect the difference between the expected levels of inflation and nominal Treasury rates.“Higher inflation expectations are not the reason 10-year yields are breaking out; real rates are the problem,” Colas said in a note on Thursday.
Meanwhile, 10- and 30-year real yields — as measured by rates on Treasury inflation-protected securities, or TIPS — provide a look at how the underlying economy is performing after subtracting inflation. Higher real yields also indicate that the inflation-adjusted cost of borrowing is going up. As of 3 p.m. Eastern time on Thursday, the 10-year TIPS yield was at 1.979% and the 30-year TIPS yield was at 2.102%, according to Tradeweb.
Real long-term rates of 2%-3%, or levels seen in 2006-2007, could also reduce consumption and investment by increasing the cost of consumer debt and corporate cost of capital.
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