Why are Treasury yields the highest in a decade? 4 reasons.

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Bond yields are at their highest levels in more than a decade, weighing on borrowers and the stock market. While pinpointing the causes can be tricky, four factors are at the top of the strategist’s list.

the

10-year Treasury yield
The index rose to 4.336% on Monday, its highest level since 2007 and on track for its largest monthly increase since February. the

30 years
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At 4.457%, it was at its highest level since 2011 and posted the largest monthly increase since October, according to Dow Jones Market data.

One of the main reasons behind the increase is the expectation that the Federal Reserve will keep interest rates higher for a longer period. Minutes of the central bank’s July meeting show that most officials saw “significant upside risks to inflation” which may require further interest rate increases. And there was a 10% increase in the number of investors expecting a rate hike by the end of the year, versus a month ago, according to the CME FedWatch Tool.

“The answer is…the Federal Reserve. The back end of the curve has caught on a very hawkish central bank tone lately,” wrote David Rosenberg, economist and president of Rosenberg Research & Associates.

The Fed’s effort to reduce its balance sheet is also a factor, as it has the same effect as increasing interest rates. The central bank has it Goal By reducing its holdings of Treasury and agency debt by $95 billion a month, though it has been largely down so far. Last week’s cut of $62.5 billion, though, was the biggest weekly drop on its balance sheet since early April. Its balance of $8.146 trillion is also the lowest since July 7, 2021.

“While the previous weeks of extraordinary cuts to the federal budget this year didn’t have a significant impact on returns, last week’s significant decline in holdings appears to have hit home,” Nicholas Colas, co-founder of DataTrek Research, writes.

Weakness in loan growth is another factor, because when banks become less willing to extend credit or demand for loans drops, it can have the same effect as interest rate increases by the Federal Reserve. Small banks showed gross loan growth of 1.9% as of Aug. 9, on a seasonally adjusted basis, the lowest in nearly 12 years, according to data released in Friday. Banks across the country have seen negative loan growth year-on-year since mid-July.

The fourth factor cited by strategists is economic data. Weekly jobless claims came in at 239,000 last week, indicating that the economy is still going strong. GDP for the second quarter also grew by 2.4%, beating expectations. Taken together, it provides ammunition for the Federal Reserve to continue raising interest rates.

“There is no evidence that the US economy is losing momentum at this point,” Tom Esaye of Sevens Report Research wrote. “The sooner claims drift towards 300k, the better because that will take some of the upward pressure off Treasury yields.”

Write to Karishma Vanjani at karishma.vanjani@dowjones.com.