30-Year Treasury Yield Hits 5.28%, Yield Curve Steepens, but Spreads Still Narrow

On Friday, the yield on the 30-year Treasury climbed to 5.28%, the highest level since July 2006, indicating the continuation of a bond bear market into its sixth year. The yield rose by 7 basis points that day and 12 basis points over the week, now standing 165 basis points above the Effective Federal Funds Rate (EFFR). Fed Chair Warsh attributed the increase in yields to the cessation of forward guidance, as market attention shifts to inflation and economic indicators. This bond market response highlights worries about inflation diminishing purchasing power and the influx of supply necessitating higher yields to entice buyers. The bear market has inflicted notable losses on long-term bondholders, including regional banks that failed in 2023 due to reliance on Fed guidance. The 10-year yield reached 4.75%, with a steepened but still relatively flat yield curve; the 2-year/10-year spread is at 45 basis points and the 3-month/10-year spread at 92 basis points, both historically low during growth phases. While Warsh seeks to further reduce the Fed's balance sheet, he lacks majority backing. Short-term yields fell, with the three-month yield at 3.83%, reflecting anticipation of a rate hike in September. The article also notes that the 40-year bond bull market concluded in mid-2020, with the current bear market characterized by volatility and the collapse of banks that relied on Fed guidance.