Why have US long-term yields risen?
Economic Commentaries, News It is primarily rising term premiums, not higher policy-rate expectations, that explain the increase in US long-term yields since last summer. This is according to an analysis by Jan Alsterlind at the Monetary Policy Department.
US yields have risen by almost 100 basis points since last summer. The increase has, to a varying extent, spread to bond yields in other countries. A brighter economic outlook and rising long-term inflation expectations have been highlighted by several analysts as explanations for the increase. When the economy improves and inflation is expected to rise, investors normally assume that the US central bank, the Federal Reserve, will raise policy rates more, and perhaps earlier, than they previously thought. There are signs that investors have changed their view about the future policy rate, since last summer, but not to such a degree that it can explain all the increase in long-term US bond yields. There are therefore many indications that the rising yields are primarily due to the compensation required by investors in order for them to invest in longer-term bonds, the so-called term premium, having increased.
The brighter economic outlook and higher long-term inflation expectations are linked to the extensive economic policy support in the country. The expansionary fiscal policy in the United States is being funded by an increased supply of long-term nominal bonds. When the supply of bonds increases, yields may need to rise in order for investors to be willing to hold more bonds in their portfolios, without this necessarily affecting policy-rate expectations. At the same time, the Federal Reserve has expressed a tolerance for higher inflation, which may have made investors demand extra compensation to hold nominal bonds. Furthermore, in a historical perspective, the term premium normally increases when an economy goes into recession. And this also seems to be the case this time.
There are therefore several reasons for the recent increase in the term premium in the United States, which seem to be the most important explanation for the increase in long-term yields.
Read more in the Economic Commentary “Why have US long-term yields risen?”
By Jan Alsterlind. The author works in the Riksbank’s Monetary Policy Department.