Why Are U.S. Yields Rising? It’s the Economy!

Executive summary:

  • Despite likely Fed rate cuts this year, U.S. government bond yields have risen on the back of stronger-than-anticipated economic performance.
  • Although inflation over the first quarter came in slightly higher than expected, encouraging signals from forward-looking indicators suggest that the broader disinflation trend will continue.
  • With a probability-weighted fair value estimate of around 3.9%, our outlook for U.S. government bonds in the months ahead remains positive.

Something strange has occurred in the bond market. Despite expectations for interest rate cuts by the U.S. Federal Reserve (Fed), yields have risen since the start of the year, with the U.S. government 10-year bond yield climbing nearly 70 basis points (bps) this year through April 10. This is a sharp reversal from what occurred in the fourth quarter of last year when the 10-year yield collapsed by 71 bps. Such swings aren't normal from a historical perspective. But bond market volatility remains elevated, and such variance from period to period has been the recent norm.

So, what's going on?