Sun, October 01, 2023
In October 1991, three weather systems converged off the coast of Nova Scotia. The severe event that resulted from this rare combination was chronicled in a 1997 book by Sebastian Junger and ultimately in a feature film adaptation. Since the movie’s release, the term “perfect storm” has entered the popular lexicon, referring to any challenging period that results from the simultaneous occurrence of several negative or unpredictable factors. The US Treasury bond market may be experiencing an event akin to a perfect storm. The convergence of several factors has caused a dramatic rise in yields over the last several weeks, especially in longer-dated treasury bonds. The yield on the 10-year treasury bond has jumped nearly a full percentage point since the end of the second quarter while the 30-year yield has risen just over 1%. We’ll examine three factors-the Federal Reserve’s “higher for longer” message, ballooning government debt and deficits, and quantitative tightening. Furthermore, we’ll discuss the ramifications for the economy, markets, and portfolio strategy.