In a series of events that have sent shockwaves through the financial markets, US Treasury yields rise to fresh highs for 2023. Bond investors are spooked by the prospect of a flood of government-debt issuance, the strength of the labor market and a sovereign credit rating downgrade, prompting a sell-off in Treasuries across various maturities.
On Wednesday, the 10-year Treasury yield rose, exceeding 4.12% at some point, a level not seen since November 2022. Simultaneously, the yield on 30-year bonds reached 4.2%, marking the highest point in almost nine months. This move also contributed to a spike of 30-year mortage rates, above 7%.
This sharp rise can be explained by several factors. First of all, the US Treasury has taken unprecedented steps to finance a surge in budget deficits. According to the latest announcement, the upcoming quarterly refunding auctions will see the sale of $103 billion of longer-term securities, slightly more than most analysts had anticipated. Additionally, the Treasury has plans for larger sales of debt across various maturity periods.
Overnight, the government’s AAA credit rating was downgraded by Fitch Ratings, citing the alarming fiscal situation. Lastly, the upward momentum in yields was also fueled by robust jobs data released recently. According to figures from the ADP Research Institute in collaboration with Stanford Digital Economy Lab, US companies added an impressive 324,000 jobs in July, surpassing economist estimates. The job gains were widespread but were particularly bolstered by a 201,000 increase in the leisure and hospitality sector.
These developments in the bond market and labor market underscore the challenges the US economy faces in the near term. Investors and policymakers will closely monitor economic indicators to navigate the potential impacts on financial markets and the broader economy.