Federal Reserve Chairman Kevin Warsh said the strength of the U.S. economy is driving the recent rise in long-term Treasury yields, a climb that has raised concerns about the central bank's handling of inflation and the country's fiscal burden. He also pointed to competition for funding among Big Tech companies and conflicts around the world as forces pushing up long-term rates.
According to The Wall Street Journal and Reuters, Warsh was asked at a news conference following the Federal Open Market Committee meeting on the 16th about the backdrop to rising long-term Treasury yields and what the bond market is signaling about growth prospects and the neutral rate. "I'll let the markets speak about what bond prices are saying about the economy ahead," he said, while citing three factors behind the increase.
The first, Warsh said, is a solid economy. In his assessment, long-term Treasury yields have risen this year in part because the U.S. economy has proved stronger than expected.
He also cited competition to secure funding amid a surge in capital spending. "The hyperscalers are raising money in the markets, so there is real competition for capital as well," Warsh said.
Geopolitics was the third factor he offered for the rise in long-term rates. "Conflict zones around the world are pushing up long-term rates," he said. "It's not just a question of spot prices for energy or corn, soybeans and wheat, but of the gap between spot prices and what's known as the crack spread, and how that affects the prices of goods sold in stores across the country."
Meanwhile, the bond market steadied somewhat as the Fed struck a hawkish tone, even hinting at the possibility of further tightening, in a move read as confirming its resolve to contain inflation. According to Bloomberg, the yield on the 10-year U.S. Treasury note fell 3 basis points (1 basis point equals 0.01 percentage point) to 4.99% on the 17th, ending an eight-session run of gains. Australian government bond yields of the same maturity fell 4 basis points, and Japanese government bond yields declined about 1 basis point.
Higher oil prices driven by mounting tensions in the Middle East lifted inflation expectations, sending the average yield on global government bonds to a 19-year high this week. The Fed raised its benchmark rate by 25 basis points, in line with market expectations, and Fed officials signaled one more increase this year.
While digesting the Fed's decision, investors are turning their attention to the Bank of Japan, which announces its rate decision on the 18th. Markets expect the BOJ to raise its policy rate to 1.25% from 1%.
Some observers say the bond market is likely to absorb a BOJ rate increase itself without much difficulty. Others note, however, that strongly hawkish comments accompanying the decision could rattle global markets.
