30-year Treasury yield reaches 19-year peak, analysts warn of further upside
The yield on the 30-year U.S. Treasury rose to 5.311%, its highest level since June 2007, prompting strategists to outline factors that could push it even higher.
The 30-year U.S. Treasury yield climbed more than four basis points on Monday to 5.311%, the strongest level in nearly two decades. The increase came as foreign holders, including the United Kingdom, China and Japan, reduced their Treasury positions, according to a Treasury Department report.
Fundstrat technical strategist Mark Newton said long-term yields could rise to 5.60%-5.70% and accelerate because a three-year chart pattern has resolved. > "Long-term yields look likely to push up to 5.60%-5.70% and likely move up at a quicker pace than normal given the recent resolution of this three-year triangle pattern," Newton said.
Newton pointed to rising yields in Japan, where weaker growth and a hotter GDP deflator lifted ten-year and twenty-year JGB yields, spilling over into U.S. markets. Industry veterans noted that continued increases in other developed markets could force investors to demand higher returns on U.S. debt.
BMO strategists highlighted fiscal concerns across the United States, Japan, the United Kingdom and Europe as another possible driver of the sell-off in long-dated bonds, even if U.S. economic data softens.
Deutsche Bank warned that a combination of resilient growth and strong equity markets could keep financial conditions accommodative, prompting the Federal Reserve to raise rates more aggressively than markets currently expect. > "By definition, strong growth and buoyant risk assets mean that financial conditions will remain accommodative, raising demand and pushing central banks into faster rate hikes," macro strategist Henry Allen wrote.
The bank added that inflation remains above target and historically, CPI above 3% has been linked to more than 100 basis points of tightening in the first year of a Fed-hiking cycle.
A third risk factor involves the supply side of long-dated debt. BMO noted that the latest 30-year auction cleared at its highest yield since 2001, and several recent 20-year auctions showed weak demand. Persistent inflation, especially from energy prices, could further pressure yields, and a new commodity shock could affect both equities and bonds simultaneously.
Deutsche Bank summed up the outlook by saying current market pricing leaves little margin for error.