The Real Reason Behind Surging 30-Year Treasury Yields: Explained
Over the last few weeks, bond markets have been on the move: 30-Year Treasury yields have rapidly surged from below 4% to almost 4.50% catching many by surprise.
Yet understanding why and what drives bond market action is a crucial skill for macro investors, so let’s explore together an approach that will help us make sense of the recent bond market developments.
Nominal bond yields can be thought of as the interaction between:
When it comes to economic growth, we must consider two angles: structural and cyclical growth.
Structural economic growth can be generated through more people joining the labor force (good demographics) and/or through more productive use of labor and capital (strong productivity trends).
The ability of an economy to generate structural growth is an important driver behind long-dated bond yields (strong structural growth = structurally higher long-dated yields and vice versa).
Short-term economic cycles also matter for bond yields — particularly at the short end.
Cyclical growth trends are driven by the credit cycle, the fiscal stance, earnings growth, labor market trends, and more — the healthier they are, the higher short-end bond yields can be pushed also as a result of a likely tightening from Central Banks that might grow worried about economic over-heating and inflationary pressures in such an environment.
Analysts stopped revising their 2023 earnings per share (EPS) expectations and started revising them higher for 2024 — they are now looking for a healthy 12% EPS growth for next year!
On top of this, consider that:
In short, long-term growth expectations were revised higher: the first item of the equation above contributed to pushing 30-year Treasury yields higher.
The second component
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