Hi YXI friends,
Bond yields are making headlines this week, as long-end yields spiked despite waning expectations for front-end rate hikes.
The key driver for this divergence isn’t inflation expectations, which have softened, but the rising term premium. Term premium is the extra yield investors demand for holding long-duration bonds to compensate for the potential changes in interest rates. It has risen to a multi-year high.
The rising term premium signals both a lack of investor confidence in the White House’s fiscal discipline and a general lack of demand appetite.
Japan has been one of the biggest buyers, but they are now busy defending the Yen, which means reduced appetite for US assets. China is also a big buyer, but it has shifted more of its allocation towards Gold in the past five years. Private households appear stretched here, even though a 4.7% 10-year yield seems a pretty good deal given it makes over 2% real returns (i.e. returns net of inflation).
Moreover, the Treasury General Account has recently been very elevated, which I have warned is a headwind for the marginal demand for stocks and bonds.
My read is that the long-end yields can climb even higher in the near-term, but Bessent will get twitchy when the 10-year yield approaches 5%.
Housekeeping - some more changes are coming to the TA section. I will bring in some of the individual model signals (Trend, Market regime) that keep us as objective as possible. The goal is to help you understand the market context in a more systematic way, without losing the visual layer.
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