Has the Federal Reserve lost control over U.S. long-term bond yields?
The yield on the 30-year U.S. Treasury bond is approaching 5%, while the federal funds rate expectation is 50 basis points below its peak, indicating a significant rise in term premium. Reasons include an anticipated increase in U.S. Treasury supply and rising inflation expectations. Deutsche Bank believes that despite the rise in term premium, it is not considered high by long-term historical standards. Factors that may lead to the 30-year U.S. Treasury yield breaking above 5% in the future include fiscal easing and strong employment data. Gundlach believes that after the Federal Reserve cuts interest rates, long-term U.S. Treasury yields may rise and yield curve control may be restarted
The yield on the 30-year U.S. Treasury bond is approaching 5%, while the market pricing for the "Federal Reserve policy rate" federal funds rate is 50 basis points lower than the previous peak period. This phenomenon indicates a significant rise in term premium.
There are many reasons behind the rise in term premium: including expectations of increased U.S. Treasury supply, as well as rising inflation expectations. Additionally, the market anticipates that foreign investors may gradually reduce their allocation to dollar assets.
Deutsche Bank believes that even after the recent increase, the term premium is not considered high by long-term historical standards.
The bank thinks there are several factors that could easily push the yield on 30-year U.S. Treasuries above 5% in the future:
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U.S. fiscal easing is stronger than expected, such as recent tax cut proposals;
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Data in the coming months shows a strong labor market and rising inflation pressures;
The "new bond king" Gundlach has recently been expressing the view that the next time the Federal Reserve cuts interest rates, long-term U.S. Treasury yields may "rise instead of fall";
He believes the Federal Reserve is likely to be forced to restart "yield curve control (YCC)", and even the U.S. Treasury may "restructure U.S. Treasuries".
At that time, he believes the currently popular "U.S. Treasury steepening trade" will face shocks. (Chasing Wind Trading Desk)
