A lot of attention was given to this chart today …
This is the U.S. 30-year yield. It broke out above 5% on a weak bond auction (weak demand).
The yield on the long bond now trades just 9 basis points shy of the October 23, 2023 high. A break of that would be an 18-year high.
Is this the ratings downgrade effect — the shift out of the long end of the bond market (prices down, yields up)?
As you can see in this next chart, there is a steeping in this spread between the yield of the 30-year and the 2-year Treasury which could suggest the bond market is indeed repricing for more fiscal profligacy.
But relative to history, the spread (30s-2s) is on the low side of the historical average.
That said, it's the level of the 30-year is what is getting the market's attention.
And the level has everything to do with Fed policy.
Not only does the Fed continue to hold short term rates above 4%, 200 basis points above the rate of inflation (PCE), they've spent the past week dropping hawkish commentary.
In a prepared speech last week, Jerome Powell wanted to make clear to markets that PCE at 2.3% isn't tolerated. He suggested they will be reversing their 2020 policy of a "symmetric" inflation target, which was designed to allow the economy to run hot, above 2% inflation, for a while, to make up for the decade (prior to 2020) of below target inflation.
Inflation did run hot. And the average inflation over the past 15 years did indeed finally return back to 2% (slightly above).
The fact that they think they now need to abandon this "symmetric" inflation target, and explictly communicate it to markets, is hawkish posturing. That puts upward pressure on the yield curve.
Now, with all of this in mind, the bigger news for interest rates is the progress on stablecoin legislation.
This, regulated dollar-based stablecoins, backed by Treasuries or cash (or cash equivalents) will unlock trillions of dollars of new demand for Treasuries. And this will shore up the dollar's dominance and lower the government's cost of capital. And the legislation calls for a maximum 120 days to either approve or reject applications for new coins. So when this passes, the new Treasury demand will come on-line quickly.