10 July 2023
The 10-year yield reached its highest level since early March, indicating a shift in the bond market. Previous rallies fueled by hopes of QE have been replaced by a selloff, causing yields to rise. The Treasury Department plans to increase issuance of longer-term notes and bonds, attracting more buyers but also increasing supply. The Fed’s reduction of Treasury holdings further adds to this dynamic. The longer-term Treasury market is gradually accepting the likelihood of higher inflation and interest rates, challenging previous assumptions. In contrast, short-term Treasury yields have adjusted to market conditions, projecting two more rate hikes this year. The six-month and one-year yields reflect this sentiment, with no denial of the prospect of higher rates within their respective timeframes.