Federal Reserve Governor Christopher Waller has characterized the recent surge in US yields as nothing short of an “earthquake” for the bond market. During a lecture on economic data, Waller expressed his concern about the significant increase in yields on 10-year Treasuries, which have risen by more than 100 basis points since the end of July, attracting substantial attention.
While government bonds have experienced a rally in recent days, alleviating the benchmark rate to 4.58%, 10-year yields breached the 5% mark for the first time since 2007 last month.
Waller acknowledged the magnitude of this yield surge, stating, “Since the end of July, this thing has gone way up, almost a full percentage point. In central bank terms, in financial markets, that’s an earthquake.” He emphasized that there has been considerable speculation regarding the factors driving this increase, though he refrained from delving into specific details.
Indeed, bond investors are currently evaluating whether the upward trajectory in yields is poised to continue. The anticipation of increased government borrowing has fueled expectations for higher rates in the future, while the Federal Reserve has left the possibility of another interest rate hike in the coming months open for consideration. However, the elevated yields highlighted by Waller have contributed to tighter financial conditions, potentially reducing the momentum for additional rate hikes.
Krishna Guha, vice chairman of Evercore, noted that Waller’s remarks should be viewed in context and were not part of a policy discussion. He suggested that Waller’s comments might have been more nuanced had they been part of such a discussion. Nonetheless, it is reasonable to infer that the Federal Reserve is not asserting that all the tightening of financial conditions stemming from the surge in yields has been completely unwound in recent weeks.
