United States: Different from last year, the expansion of term premium
2024-11-07
■ Since October, the 10-year US Treasury yield has risen, driven by the widening term premium.
■ Monetary policy has limited room for response due to easing recession expectations and expansionary fiscal policy.
Since October, the 10-year US Treasury yield has risen for the first time in six months, ending the previous downward trend in yields caused by expectations of a rate cut by the Federal Reserve (FRB). During October, the 10-year US Treasury yield rose by about 0.48%, reflecting the financial tightening effect of the 0.5% rate cut implemented by the Federal Reserve in September, which was almost offset. The reasons for the rise in yields include: (1) the expectation of a significant rate cut by the Federal Reserve has been revised due to the slowdown in the adjustment of the labor market; (2) the continued growth trend of personal consumption has weakened expectations of a US recession; (3) as the US presidential election approaches, people are more concerned about the expansionary fiscal policy that the new administration may introduce and the resulting rise in inflation. Especially (3), although the polls show that the approval rating is relatively close, some forecast markets show that the probability of former President Trump's victory has increased, which has triggered concerns about his advocated tax cuts, foreign tariffs, and immigration restrictions.
The latest value of the 10-year term premium estimated by the Federal Reserve Bank of New York is about 0.23% (as of November 4), which has expanded by about 0.33% since the end of September and reached its highest point since November last year. The term premium represents the difference in expected returns between long-term bonds and short-term bonds during the holding period under the assumption of a given policy interest rate path, and its value reflects the size of the additional interest rate (premium) for holding long-term bonds. Since the US 10-year Treasury yield has risen along with the term premium since October, it can be considered that the main reason for the rise in yields is due to (2) and (3) above and reflects the market's vigilance against rising medium- and long-term interest rates.
The expansion of the term premium in 2023 is entirely due to financial tightening. At that time, inflation peaked, and job openings declined. Therefore, the tightening of the economic environment caused by the rise in yields became one of the reasons for abandoning interest rate hikes at that time. In contrast, the current expansion of the term premium occurred after the rate cut, and due to the tight economic supply and demand caused by expansionary fiscal policy and the deterioration of the balance between supply and demand of US Treasury bonds, the room for monetary policy response is more limited than in 2023. Even if the Fed continues to cut interest rates to ease the pressure on yields, economic supply, and demand tensions may further promote the expansion of term premiums. At the Federal Open Market Committee (FOMC) meeting on November 6-7, the understanding and response plans for the rise in US Treasury yields will become a new focus.
■ Monetary policy has limited room for response due to easing recession expectations and expansionary fiscal policy.
Since October, the 10-year US Treasury yield has risen for the first time in six months, ending the previous downward trend in yields caused by expectations of a rate cut by the Federal Reserve (FRB). During October, the 10-year US Treasury yield rose by about 0.48%, reflecting the financial tightening effect of the 0.5% rate cut implemented by the Federal Reserve in September, which was almost offset. The reasons for the rise in yields include: (1) the expectation of a significant rate cut by the Federal Reserve has been revised due to the slowdown in the adjustment of the labor market; (2) the continued growth trend of personal consumption has weakened expectations of a US recession; (3) as the US presidential election approaches, people are more concerned about the expansionary fiscal policy that the new administration may introduce and the resulting rise in inflation. Especially (3), although the polls show that the approval rating is relatively close, some forecast markets show that the probability of former President Trump's victory has increased, which has triggered concerns about his advocated tax cuts, foreign tariffs, and immigration restrictions.
The latest value of the 10-year term premium estimated by the Federal Reserve Bank of New York is about 0.23% (as of November 4), which has expanded by about 0.33% since the end of September and reached its highest point since November last year. The term premium represents the difference in expected returns between long-term bonds and short-term bonds during the holding period under the assumption of a given policy interest rate path, and its value reflects the size of the additional interest rate (premium) for holding long-term bonds. Since the US 10-year Treasury yield has risen along with the term premium since October, it can be considered that the main reason for the rise in yields is due to (2) and (3) above and reflects the market's vigilance against rising medium- and long-term interest rates.
The expansion of the term premium in 2023 is entirely due to financial tightening. At that time, inflation peaked, and job openings declined. Therefore, the tightening of the economic environment caused by the rise in yields became one of the reasons for abandoning interest rate hikes at that time. In contrast, the current expansion of the term premium occurred after the rate cut, and due to the tight economic supply and demand caused by expansionary fiscal policy and the deterioration of the balance between supply and demand of US Treasury bonds, the room for monetary policy response is more limited than in 2023. Even if the Fed continues to cut interest rates to ease the pressure on yields, economic supply, and demand tensions may further promote the expansion of term premiums. At the Federal Open Market Committee (FOMC) meeting on November 6-7, the understanding and response plans for the rise in US Treasury yields will become a new focus.