High bond yields are the latest signal that the United States economy may be aching over the effects of high inflation. An increase in interest rates to combat soaring inflation during the Biden administration has rippled through the American economy and could have significant unexpected effects.
A number of government bond yields have increased in recent months, with 30-year Treasury notes surpassing 5% this week before settling slightly lower.
The news came after the recent unemployment figures released by the Department of Labor. Further information was expected to come with September’s jobs report.
The situation appeared difficult for the markets, which dipped on Thursday. Should unemployment figures read negatively, it could be a sign that the United States is heading into a recession. Should they come back stronger than expected, it is a possible sign of higher inflation and higher possible interest rates.
All of this means that some in the market are factoring in the possibility of renewed interest rate hikes by the Federal Reserve.
Other bonds followed the 30-year note, as a 10-year Treasury note increased to 4.5, the highest level in almost 20 years. Furthermore, a two-year treasury note is now above 5%.
Chart of the Week – Stocks vs Bonds Relative Value
Thanks to the surge in bond yields, stocks are looking increasingly expensive vs bonds. This fact along with numerous leading indicators pointing to recession increasingly shifts the odds in favor of bonds (vs stocks).
— Topdown Charts (@topdowncharts) October 2, 2023
Federal Reserve Chair Jerome Powell denied the connection between inflation and increased bond yields.
The decline in Wednesday trading follows several weeks of stock market declines. While inflation has slowed down in recent months, it is still significantly higher than the 2% goal of the Federal Reserve.
The higher rates could also be a major factor in the federal budget. Washington is running a significant deficit, previously financed on relatively low-interest rates. The increases mean that the new debt will cost more to pay back and that the new debt will be borrowed at the new, higher rates.
Overall, this means that the already-high federal deficits will likely increase to help service the debt. The United States is nearing more in payments on the federal debt than the entirety of the defense budget.