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Interest Rates

Five Major Factors That Can Swing Treasury Yields

26 Feb 2024

In the two and half years since the launch of U.S. Treasury Yield futures, 30Y yields have more than doubled, 10Y yields have more than tripled while 2Y yields have soared by nearly 30-fold. Currently, 2Y yields are trading higher than 10-year or 30-year yields due to the inversion of the yield curve (Figure 1). The yield curve inversion is the result of the Federal Reserve’s (Fed) biggest tightening cycle since the early 1980s, itself a consequence of the post-pandemic surge in inflation.

Figure 1: 2Y Treasury yields have risen far more than 10s or 30s as the Fed tightened

Figure 1: 2Y Treasury yields have risen far more than 10s or 30s as the Fed tightened
Source: Bloomberg Professional (YQI1, YQT1 and YQB1)

Inflation

Figure 2: Will US return to 1994-2020 norm of 2% inflation? Or is it the 1970s Part 2?

Growth

Figure 3: Economic downturns often follow yield curve inversion

Figure 4: GDP growth correlates positively with yield curve slope with a 2 to 2-1/2 year lag

Financial Stability

Quantitative Tightening/Quantitative Easing

Figure 5: An expanding Fed balance sheet has meant a structurally flatter yield curve

Budget Deficits

Figure 6: The U.S. budget deficit at 6.5% of GDP implies heavy Treasury issuance

Yield futures

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