On the 19th local time, interest rates on 10-year U.S. government bonds once exceeded 5% annually on the U.S. electronic trading platform Trade Web. It is the first time in 16 years that the 10-year U.S. Treasury bond rate has exceeded 5% since July 2007, just before the global financial crisis. The 10-year U.S. Treasury bond rate is not small in that it is the basis for global as well as U.S. interest rates. U.S. Federal Reserve Chairman Jerome Powell’s remarks that U.S. inflation remains too high also affected the rate hike.
The rise in U.S. long-term government bond rate means that interest rates are expected to rise further in the future. In the case of 10-year government bond rates, the market has comprehensively judged the overall interest rates one year later, two years later, and 10 years later. Although it is a forecast, it is the 10-year government bond rate that quantifies the interest rate outlook seen in the current situation. Such a jump in long-term interest rates means that U.S. interest rates will continue to march on high-interest rates in the future.
So why do government bond rates keep rising? One of the main reasons is the expectation of a strong economy. Recent economic indicators show that U.S. retail sales exceeded forecasts last month and industrial production was good. The job market was also solid. Powell also said that economic growth and the slowdown in the job market seem to be needed for a certain period of time to fall to the 2% inflation target based on indicators so far. In short, it means that we need to cool down the overheated economy.
Another reason for the sharp rise in interest rates on long-term government bonds is the issuance of government bonds, which have increased significantly. The U.S. government has greatly increased the issuance of government bonds to raise funds for the war in Ukraine and various welfare policies. Now that the number of government bonds released in the market has increased, prices are falling and interest rates are rising instead. It’s the same reason that the price drops when a product is released in large quantities in the market.
And here’s the exogenous variable. It’s the conflict between Israel and Hamas following the war in Ukraine. Although it is still a local war, conflicts are showing signs of spreading to the neighboring Middle East as Iran and Lebanese militants Hezbollah have expressed their intention to intervene. This conflict in the Middle East means a surge in oil prices. Surging oil prices could boost prices while cooling the economy while dashing cold water