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August is turning out to be one of the worst months in 2023 for U.S. government debt, and there’s still more than a week left to go.
As of Tuesday, U.S. government debt produced a total return of minus 1.9475% for this month, based on a Bloomberg index of Treasurys. That’s worse than any other month besides February, which served as the run-up to the regional banking crisis.
Source: Bloomberg, FHN Financial.
Ten- and 30-year Treasury yields have been rising since April as traders and investors re-evaluate the strength of the U.S. economy and factor in higher real, or inflation-adjusted, rates over a longer period. Yields move in the opposite direction as prices, so rising Treasury yields reflect the fact that traders and investors have been selling off the underlying maturities.
Read: Rise in Treasury yields is almost entirely due to one factor, strategist says
“Signs of economic overheating have pushed up yields this cycle through higher expectations for Fed tightening,” said Will Compernolle, a macro strategist for FHN Financial in New York.
In a note released on Tuesday, Compernolle wrote that “part of the jump in yields this month is a growing sense the Fed will pause longer than previously expected, and part of it is some modest increases in medium-to-long term inflation expectations, as expressed by breakevens.”
The rise in yields seen during August “has more or less fulfilled the upside risk to rates at the long end of the curve we forecasted as recently as a few weeks ago,” the analyst said. “The curve has shifted away from confidently pricing a soft landing closer to the ‘no landing’ in our last forecast grid.” Meanwhile, fed funds futures trading “still shows an expectation for rate cuts both sooner and more aggressive than we expect next year, suggesting rates still have some room to rise at the shorter end of the curve.”
Friday’s Jackson Hole speech by Federal Reserve Chairman Jerome Powell may give markets a better sense of how policy makers are viewing the U.S. economy’s long-term prospects.
As of Tuesday afternoon, 10- and 30-year yields were respectively down from their highest closing levels seen since Nov. 6, 2007, and April 27, 2011. Meanwhile, U.S. stocks were mostly lower after ending Monday with month-to-date declines of almost 3.11% for Dow industrials
DJIA,
4.1% for the S&P 500
SPX,
and 5.9% for the Nasdaq Composite
COMP.
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