Bond Market Smells a Rat: 10-Year Treasury Yield Hit 1.04%, Highest

Seems, inflation prospects jangled some nerves today.

By Wolf Richter for WOLF STREET.

The 10-year Treasury yield jumped 8 basis points today and settled at 1.04%, the highest since the wild panic days in mid-March 2020. As the yield rises, the price of that bond falls. This yield has now exactly doubled from the historic low of 0.52% on August 4, when folks were still betting that the 10-year Treasury yield drop below zero:

The 30-year yield jumped 11 basis points today to 1.81%, the highest since February 26. On March 3, as all heck was breaking loose, the yield had briefly plunged below 1% for the first time ever, and days later it was back at nearly 1.8%, in some wild and volatile panic trading. But this time, the upward trend started on August 4 and has been systematic:

Might the bond market be smelling a rat?

Yes, inflation. The bond market is smelling it. Everyone is smelling it. The Fed is touting its new philosophy of letting inflation run hot for a while – whatever “hot” and “for a while” might mean. The Fed’s inflation measure is “core PCE,” which nearly always runs below “core CPI” which always runs below whatever inflation people are actually experiencing in real life.

The prospects of inflation are further heightened by the possibility of additional big-fat stimulus packages, on top of the big-fat stimulus packages that Congress already passed in 2020. In addition to possibly firing up inflation as this money gets spent — and we have already seen some of this in real life — these stimulus packages need to be funded by debt issuance, putting more upward pressure on yields.

Chicago Fed President Charles Evans, a voting member this year on the FOMC, explained yesterday at a virtual meeting that “frankly if we got 3% inflation that would not be so bad” as long as it is not accelerating uncontrollably.

So, 3% as measured by core PCE. Something like 3.5% to 4%, as measured by core CPI. That would be a hefty dose of inflation for those who bought 10-year securities at a yield of 0.6% in the summer, or even those who bought them at a yield of 1.04% today, or worse, those who bought longer-dated Treasuries, looking at the next two decades.

Inflation destroys the purchasing power of bonds. The yield is supposed to compensate for that risk. But in this scenario, with current Treasury yields, it’s not even close.

And mortgage rates got nervous over the past couple of days. For example, the average jumbo fixed-rate 30-year mortgage rate jumped by 13 basis points today, from near record lows, to 3.25%, according to Mortgage News Daily. Maybe just a blip, but it shows some nerves got jangled.

But clearly, bond markets are only getting a teeny-weeny bit nervous because yields are still extremely low. Left up to its own devices, the Treasury market with these Fed-inspired visions of inflation, might react more strongly. But the Fed is still buying Treasuries and mortgage-backed securities, and that is…