Government bond yields have surged to their highest levels since mid-summer, following a significant move in the bond market after the Federal Reserve’s recent interest rate cut.
On Tuesday, the yield on the benchmark 10-year US Treasury note surpassed 4.2% for the first time since July 26, while the yield on the 2-year government bond reached 4.06%, the highest since August 20, according to CNBC data.
This increase in bond yields is notable given that the Fed reduced its target federal funds rate by 0.5 percentage points on September 18. Typically, Treasury yields reflect market expectations for future monetary policy, suggesting that investors are now anticipating higher interest rates in the coming years compared to previous projections. Before the Fed’s rate cut, the yield on the 2-year note was around 3.65%, and the 10-year yield was approximately 3.6%.
As yields rise, the value of existing bonds declines, as investors seek higher annual payouts for holding government debt. This trend also impacts broader economic conditions, influencing various types of loans, including corporate borrowing and consumer mortgages, which reached a two-month high last week.
Looking ahead, the November elections could further elevate Treasury yields. Analysts at JPMorgan Chase suggest that the election results may influence federal borrowing levels, impacting yields significantly. Their projections indicate that yields could rise in three out of four election scenarios: a Trump win with split chambers of Congress, a Trump victory with a Republican-controlled Congress, or a Harris win with split Congress. Conversely, a Harris victory with a Democratic Congress would likely have no significant effect on yields.
JPMorgan’s analysis indicates that a Trump-led government could lead to a 10 basis-point increase in the 10-year yield with a divided Congress, a 20 basis-point increase in the case of a Democratic sweep, and a 40 basis-point rise with a Republican sweep, potentially pushing the 10-year yield to about 4.6%, levels not seen since May and higher than any recorded between 2008 and 2022.
Strategists at JPMorgan highlighted that a decisive win for either party would likely trigger fiscal expansion, raising concerns about the national debt. The Committee for a Responsible Federal Budget estimates that Trump’s economic proposals could increase the US national debt by $7.5 trillion, compared to a $3.5 trillion increase under Harris’ policies.
Amid these developments, volatility in the bond market has also increased, reflecting investor sentiment about the potential outcomes of the election. Recent trading has shown bearish sentiment, with notable sales in 10-year note futures and options indicating expectations of yields reaching around 4.75% by November 22.
As of mid-October, the US national debt stands at $35.8 trillion, a significant rise from $19.6 trillion at the end of the 2016 fiscal year. The sustained increase in Treasury yields reflects growing investor concerns regarding the long-term implications of rising national debt and has been partially driven by a shift in market sentiment, which is now more optimistic about the economy and the prospect of reduced recession risks.
Market Watch, Forbes, and Bloomberg contributed to this report.
