The recent surge in long-term bond yields in the U.S. is a reflection of the nation’s economic robustness, not the expanding fiscal deficit, according to U.S. Treasury Secretary Janet Yellen.
Yellen suggests the rise in yields — which has resulted in benchmark Treasury rates reaching their highest level since the global financial crisis — essentially points to the strength of the economy, according to Bloomberg. The notion that the surge is a consequence of the U.S. budget deficit was dismissed by her Thursday.
The U.S. economy continues to show “tremendous robustness,” which could imply the need to keep rates higher for longer, Yellen said in a Bloomberg interview.
The hike in yields of benchmark Treasury bonds could potentially hinder the pace of economic growth and inflate the U.S. government’s increasing cost of borrowing.
Federal Reserve Chair Jerome Powell said last week the escalation in yields is causing a tightening of financial conditions, which could have implications on monetary policy decisions. He alluded to the economy’s ability to withstand higher borrowing costs possibly be playing a role in the escalating yields.
The escalating federal deficit has led to dependency on hedge funds, mutual funds and pension funds, as the conventional big buyers like the Fed and other significant central banks have cut down on bond buying. These new debt purchasers might demand higher returns due to their sensitiveness toward price.
After wiping out as much as a third of its value in 2022, the iShares 20+ Year Treasury Bond ETF TLT, one of the popular barometer for the long-term Treasury market, has fallen by an additional 15% in 2023 and is trading at levels last seen in July 2007.
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