Bond Markets Echo Volcker Era With Soaring Yields — America Suffered 2 Recessions Last Time They Were This High

The swift rise in U.S. government bond yields to levels not seen since the time preceding back-to-back recessions has left investors astounded. 

What Happened: The 10-year Treasury yield, a significant marker for the cost of money in the financial ecosystem, has surged over 4% in the past three years, with this week’s rates briefly pushing over 5% — a first since 2007. 

This represents the most substantial increase since the early 1980s.

This current financial climate mirrors the aggressive interest-rate hikes witnessed during the era of former Federal Reserve Chairman Paul Volcker, which led to two recessions, Bloomberg reported. 

Today, under the watch of Fed Chair Jerome Powell, the economy continues to defy pessimistic predictions and even appears to be gaining momentum, according to estimates from the Atlanta Fed.

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Why It Matters: While the “real” 10-year Treasury yield, adjusted for consumer price increases, is currently around 1%, compared to 4% at the onset of the second 1980s recession, this perplexing economic vigor has injected significant uncertainty into markets. Bond yields have sharply risen over recent months, reflecting a growing belief that the Fed will maintain high interest rates.

In line with this trend, bond prices continue to fall. The Bloomberg U.S. Treasury Total Index decreased about 2.6% this year, extending losses from its peak in August 2020 to 18%. This is a sharp contrast to 1980 when the worst peak-to-trough drop was around 7%. The current sell-off has been particularly painful due to previously low rates, which have reduced income payments that usually cushion the blow.

As traditional big buyers, like the Fed and other major central banks, reduce bond buying, the market is left grappling with an influx of new Treasuries. This pullback in bond-buying is seen as a key reason for the rising yields, even as the futures market indicates traders believe the Fed’s rate hikes have come to an end.

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