Making Sense of Sky-High Treasury Yields
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Why did the 10‑year Treasury yield spike to 5% and why does it matter for mortgages?
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Hey, everyone. It's Miriam. TELUS is out today, but I have a special guest joining me as co-host. I have my colleague, Sam Goldfarb, who's a markets reporter and covers U.S. treasury markets. And it's actually no accident that I invited Sam here to join me today. He is here because we are talking about the thing that's been the center of attention, the treasury market, and the fact that the 10-year yield hit 5%. Sam, welcome to the show.
Thanks for having me.
So you may not think that the 10-year yield affects you that much, but you probably own 10-year treasuries through a bond fund or a mutual fund. You might own them directly. And if you are thinking about getting a mortgage, the 10-year is actually the thing that determines what mortgage rates are, the primary factor that determines what mortgage rates are. And we wanted to find out how we got to 5% and where yields could go from here. So to talk about that, we have Megan Swiber. She is U.S. rate strategist at Bank of America. And in that role, she helps investors think basically about where yields could go from here and how to trade around that. Megan was a previous guest on Take on the Week, and we enjoyed that conversation so much that we decided to have her back.
Welcome to the show, Megan. So happy
to be back, Miriam.
It's really good to have you. So I'm going to just kick things off with the big question. We all know the headline. The 10-year yield hit 5%, and it was actually the highest level since 2007. Yes. Take us through the recent moves. How did we get here?
So highest level since 2007, pre-global financial crisis. Following the GFC, as we call it, yields were in this very low range. A lot of that was driven by Fed expectations. We had the Fed buying bonds through QE. We had the market really appreciating the fact that the Fed was going to be holding rates
low. Now, QE is quantitative easing, right? Yes, yes, yes.
Exactly, exactly. And we've broken out of that very low rate environment, of course, in recent years, namely coming out of the pandemic. And the big thing that shifted for investors was inflation and having to incorporate inflation expectations and a Fed that was hiking, not just because unemployment was low, but also because the Fed was needing to cool things down to tame the inflationary environment.
So have rates just been kind of on an upward, directly upward trajectory? Have they been all over the
place? So it has been a volatile several years, right? We had rates climbing as the market was pricing in. higher expectations of a Fed that was going to need to hike aggressively to combat the inflation that we saw coming out of the pandemic. And then what the Fed ultimately did, they got to a policy rate above 5%, so above where 10-year rates are trading right now, and thought that they were seeing some signs of cooling in the labor market. And with that, they delivered subsequent cuts. And we did see rates, particularly at the front end of the curve, come back down. But what's been interesting as the Fed had delivered on those cuts, 10-year rates stayed elevated versus what we've seen, again, coming out of the global financial crisis.
And now we're seeing more of this upward pressure on rates again. as the Fed is hiking rates. And the big question is, what level are they going to have to hike to? And what really is anchoring the Fed on this path to hike right now is inflation. We do see the labor market in this tenuous balance where it's a low hire, low fire environment, but we've seen unemployment decline over the past year. And if you look at real Fed funds rates, so where the Fed is setting policy, less inflation, that number has been declining. So it suggests to the Fed that they do need to height combat inflationary pressures. This is of course not just a U.S. theme but it's a global theme. And a lot of that is driven this global pressure that we're seeing on inflation right now by commodity prices namely this big upward move that we've seen in oil.
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Chapters
8 chapters
1
Why did the 10‑year Treasury yield spike to 5% and why does it matter for mortgages?
0:00–4:21
2
How did the Fed’s post‑pandemic rate hikes and inflation expectations drive yields higher?
4:21–9:38
3
What role do Treasury buybacks play and why aren’t they pulling yields down?
9:38–14:14
4
How are investors responding to higher yields – front‑end bills vs. long‑term bonds?
14:14–18:41
5
What is the term premium and how does it affect the 10‑year Treasury price?
18:41–23:20
6
How might future Fed policy and geopolitical risks reshape the yield curve?
23:20–28:50
7
What strategies should retail investors consider in a high‑yield environment?
28:50–33:44
8
When could we see yields fall back and what would that mean for bond owners?
33:44–37:40
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