Like shoppers, investors are often prone to the so-called left-digit bias — the tendency to place more emphasis on the leftmost digit of a price. Indeed, when the 10-year US Treasury bond yield — a benchmark used to price assets in America and across the world — surged from the high fours to 5.02 per cent on Monday, it caused a stir in financial markets. Yields have now swung back, but still hover at post-global financial crisis highs.
Breaching the 5 per cent barrier for the first time since 2007 is a marker of how tight financial conditions are becoming in the US Federal Reserve’s rate-raising cycle, and the growing squeeze ahead for the US economy. The 10-year Treasury yield has risen more than 3 percentage points in the past two years. The high volatility and speed of the sell-off in recent weeks, at a time when liquidity in Treasury markets “remained challenged”, according to a Fed report last week, is concerning too.
There are several drivers behind the recent jump in 10-year yields, which are up from 4.6 per cent in mid-October. First, investors have cottoned on to the Fed’s “higher for longer” narrative on rates, particularly as a slew of strong economic data has backed up its rhetoric. Second, the “term premium”, or the additional yield investors need to compensate for holding long-term bonds, has probably risen, according to analysts.