How much higher can bond yields go?

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by Shaun Richards

Later on today the news will be about the US Federal Reserve as it raises US interest-rates. Of course there is always the possibility it will not but its Chair Jerome Powell could not have hinted much more strongly.

With inflation well above 2 percent and a strong labor market, we expect it will be appropriate to raise the target range for the federal funds rate at our meeting later this month…….We will need to be nimble in responding to incoming data and the evolving outlook.

The first issue is that this will be the first interest-rate increase since 2018 and the next is that 0.25% is hardly going to make much difference to inflation which is doing this.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.8 percent in February on a seasonally adjusted basis after rising 0.6 percent in January,
the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 7.9 percent before seasonal adjustment.

Three such increases would be needed to (not quite) match the rise in February alone. Such issues have led to markets predicting this.

Rates traders are now pricing in a full seven Fed rate hikes by the end of this year. ( @lisaabramowicz1 )

Listeners to my podcast will know that I think that this is both silly ( if you believe more interest-rate increases are required then do more now) and not especially likely if we look at debt costs and the extra Covid debt we piled up. But my purpose today is to look at something which is these days more important than short-term interest-rates which is bond yields or short-term ones.

You do not need to take my word for it as the central bankers proved it post credit crunch as they piled into QE bond buying. The reason for that was that cutting short-term interest-rates was a disappointment in terms of the effect and along the way another fail for their economic models. Putting it into actual terms and bringing things more up to date around three-quarters of UK mortgages are now fixed-rate showing how we have adapted to low and in some cases zero interest-rates.

US Bond Yields

One way of looking at the changes is below.

The US Bond market is now down 7.5% from its high in August 2020, the largest correction we’ve seen in the last 25 years. The 10-Year Treasury yield has moved from 0.55% up to 2.14% during this time. ( @charliebilello)

The first context here is to think of long-term pension and investment funds and what they have lost so far. It may be worse than we think because some had to buy more bonds as yields fell in a type of equivalence to indexing in an equity market.

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The other way of looking at it is that whilst the price move is large the yield one is not because with a new high of 2.2% this morning it is 1.65%.

We can now via Yahoo Finance switch to mortgage rates.

The weekly average rates for new mortgages, as of 10th March, were quoted by Freddie Mac to be:

  • 30-year fixed rates rose by 9 basis points to 3.85% in the week. This time last year, rates had stood at 3.05%. The average fee remained unchanged at 0.8 points.
  • 15-year fixed rates increased by 8 basis points to 3.09% in the week. Rates were up by 71 basis points from 2.38% a year ago. The average fee remained unchanged at 0.8 points.
  • 5-year fixed rates rose by 6 basis points to 2.97%. Rates were up by 20 basis points from 2.77% a year ago. The average fee remained unchanged at 0.3 points.

It is only Wednesday but should we remain at current bond yields we will see another rise this week. There is food for thought here too because these days people have to borrow a lot more capital to buy property.

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reported an 18.8% annual gain in December, remaining the same from the previous month.

For our purposes it is the index level at 278.63 which is especially relevant as we note house prices are just under 2.8 times higher than at the beginning of this century.

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US businesses will also be facing higher business costs.

Euro Area

The headliner here is Germany and these days it is paying something for its debt albeit not much with a ten-year yield of 0.39%. With its usually austere public finances the pressure is not high here but the stress point is Italy. The ten-year yield is 1.9% there and this will start to ripple through the economy.


In my home country the main player these days is fixed-rate mortgages and the rise in bond yields ( 1.38%) for the five-year will mean upwards pressure here too.

Economic Growth

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This is the “rub” as Shakespeare would put it. I am not someone who is a great fan of the German ZEW indicator but it was hard to ignore this yesterday.

The ZEW Indicator of Economic Sentiment for Germany fell more sharply than ever before in the March 2022 survey. The indicator plummeted 93.6 points to a current value of minus 39.3 points. This is the biggest drop in expectations since the survey began in December 1991. By comparison, the indicator experienced a decline of 58.2 points at the beginning of the COVID-19 pandemic in March 2020.

We have been following the expected weakness of the US economy for a bit and here is the Atlanta Fed.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2022 is 0.5 percent on March 8, up from 0.0 percent on March 1. After this morning’s international trade release from the US Census Bureau and the US Bureau of Economic Analysis, the nowcast of first-quarter real personal consumption expenditures growth increased from 2.3 percent to 3.4 percent, while the nowcast of the contribution of net exports to first-quarter real GDP growth decreased from -0.94 percentage points to -1.00 percentage points.

So it was 0% and is now 0.1% quarterly growth in GDP as we count it. By its nature it is a lagging indicator as opposed to sentiment ones like the one below.

The University of Michigan’s preliminary consumer sentiment index dropped to 59.7 in the first half of this month, the lowest reading since September 2011, from a final reading of 62.8 in February. Economists polled by Reuters had forecast the index falling to 61.4.

Oh and I think the University of Michigan view gets some support from this.

Economists said the continued slump in the University of Michigan’s sentiment index was overdone relative to fundamentals and they expected the economy to continue growing.


So we find ourselves with higher bond yields but still historically low ones. You may note I have avoided mentioning real yields and that is because they are effectively meaningless now as we look at yields of 2% or so and inflation nudging 8%.

The real issue for me is stagflation and whether our central bankers will keep up their new anti-inflation rhetoric should the economy weaken? Personally I doubt it. Things are very volatile right now and in the face of inflation around 8% it seems out of phase but we may be nearing a top for bond yields.


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