US yields have risen steeply – but potential for a further rise is limited

The recently growing concern about a faster pace of inflation and faster-rising central bank interest rates have triggered a significant rise in yields in the US government bond market. There had long been fears that ten-year US yields should really have risen against the background of a more restrictive monetary policy, which goes hand in hand with key rate hikes as well as with a reduction of the Fed’s balance sheet. The latest movement could now confirm the concern that a new trend towards far higher ten-year yields will emerge.

In the past many arguments have been fielded to explain the fact that capital market yields have risen only moderately despite key rate hikes at the US central bank. In particular, the market’s expectation that the US central bank will not raise the Fed funds target rate fast and vigorously has been cited as a reason for the moderate price losses in past years. In addition, the sustained high demand for US government bonds from domestic as well as foreign investors has probably limited any potential rise in US bond market yields. Last, but not least, the US central bank continues to hold a large share of outstanding US government bonds. The effect of these holdings will probably prevent a sell-off in the US government bond market.

Further key rate hikes will probably lead to only moderate increases in ten-year US treasury yields as the Fed holds out the prospect of following a fairly gradual monetary policy course and of ending the rate-hiking cycle at 2.75%. Admittedly, the reduction of the Fed’s balance sheet could also cause yields to rise. However, going by the US central bank’s calculations regarding the yield-lowering effect of quantitative easing, the repercussions for higher yields could conversely also be limited. In addition, the continued heavy demand for US treasuries from domestic and foreign investors argues against a continued strong sell-off in the US government bond market. Overall, therefore, any potential for a further rise in US yields should remain limited.

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