Why are long-term bond yields so high? Even Jerome Powell wants to know
Why are long-term bond yields so high? Even Jerome Powell wants to know
We have talked about bond yields quite a few times in the last few months. Long-term bond yields have been rising over the last year, and that matters a lot, given how influential those bonds are to the cost of borrowing in the U.S.
Federal Reserve chair Jerome Powell was asked about this at a conference Thursday and he said that we “don’t really know” why long-term bond yields have been going up.
Which might sound a little surprising, considering he is the chair of the Federal Reserve. And … hasn’t he been listening to this program?
It’s not like Jerome Powell’s being naive here.
“I think he’s being honest. You know, honesty’s the best policy. At least that’s what my mom told me,” said Frederic Mishkin, an economics professor at Columbia and a former member of the Fed’s Board of Governors.
Mishkin said he understands where Powell is coming from. Because there are a lot of reasons why bond yields might rise.
“And I think all of them are factors right now. And then the question is, which are the most important,” Mishkin said.
One big reason that yields might be rising is that bond traders are betting the Fed is going to keep interest rates high for a while to combat inflation.
But Winnie Cisar, global head of strategy at CreditSights, said we don’t know how long the Fed’s going to keep at it.
“We’re not sure if there are structural changes in the U.S. economy and the global economy, that are going to keep inflation elevated,” Cisar said.
Another reason yields might be rising? Investors think the U.S. government might flood the market with new bonds to fund the deficit. That could push investors to sell bonds. And when bond prices fall, yields go up.
But Cisar said investors still have reasons to buy bonds, too. “U.S. Treasurys are generally viewed as the safest and highest quality, and with them now yielding much, much higher than they had for most of the post-Great Financial Crisis era, that looks much more attractive.”
If all this sounds confusing, it is.
Robert Jarrow, a finance professor at Cornell University, said Jerome Powell would like to figure this out. Because the Fed wants to be in control.
“If you know what’s pushing it up, you know what actions you can take, possibly, to reverse or change those effects,” Jarrow said.
For instance, if it turns out that bond yields are rising because investors expect rates to rise more in the future, Jarrow said the Fed can step in.
“If they are completely transparent and convey what they’re going to do to the public, that manages expectations about the future,” Jarrow said.
Powell says the Fed is monitoring rising bond yields. But the central bank hasn’t decided what to do about them yet.
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