With the 10-year yield nearing 4.8% and the 30-year yield recently touching its highest level in nearly two decades, investors have plenty of reasons to be uneasy. But the biggest catalyst behind the recent rise in yields is relatively straightforward.
"Most of the move up appears to be driven by a hawkish Fed and a higher expected short-term rate," said Collin Martin, head of fixed income research at the Schwab Center for Financial Research.
With inflation proving difficult to tame, Federal Reserve officials have struck an increasingly hawkish tone in recent weeks. Chairman Kevin Warsh reinforced that message at the late-August Jackson Hole Economic Policy Symposium.
"While this summer's [inflation] readings were better than expected, they do not tell me that underlying trends have meaningfully improved," said Warsh. "We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do."
Investors' expectations for a September rate hike moved up sharply after Warsh's comments. On Wednesday, futures trading priced in a nearly 67% chance of a rate hike at the Fed's next meeting, according to the CME FedWatch Tool. That's up from the roughly 35% odds seen just a week earlier.
However, while Warsh's Jackson Hole speech—and recent hawkish comments from other Fed officials—may have helped drive yields higher of late, Martin said the move makes sense given the broader economic backdrop.
"Treasury yields might not be a problem that needs to be fixed. They are indicative of the economic environment we're in," he explained, noting that nominal economic growth has remained robust and inflation remains well above the Fed's 2% target.
To his point, although there have been some signs of labor market cooling, nominal economic growth came in at 6.6% in the second quarter, while the personal consumption expenditures price index rose 3.7% from a year ago in July.
"The yield curve should be positively sloped given a Fed funds rate that seems to be at neutral or slightly accommodative and a resilient economy," Martin explained. "In short—yields don't appear too high given economic fundamentals."
Other forces have also put upward pressure on yields, though they vary in how much they explain the recent move. Some are relatively new developments, while others have been building for years.
Renewed military conflict between the U.S. and Iran has helped drive oil prices higher once again this week, reigniting inflation fears and lifting government bond yields worldwide. A massive wave of corporate borrowing to fund AI infrastructure has also added fuel to the fire by potentially pulling capital away from Treasuries.
Meanwhile, fiscal concerns have been mounting for years, pushing the term premium—or the extra return investors demand for the risk of holding Treasuries over the long-term—gradually higher. The term premium on a 10-year zero coupon bond, for example, hit 0.88% this month, well above the negative or near-zero figures seen during and immediately after the pandemic. However, this long-term trend doesn't appear to be a key driver of the recent rise in long-term yields, according to Martin.