Why US Treasury Yields Are Rising at Different Rates Based on Maturity – Understanding the Reasons Behind This Trend

On Friday, major currency pairs experienced limited price movements, with slight gains observed in commodity dollars such as the Australian Dollar (AUD) and Canadian Dollar (CAD), owing to moderate positive developments in the commodity market. US equities showed signs of weakness yesterday, as the S&P 500 index drifted towards 4500 points. However, today, index futures are attempting to rise, albeit with modest growth not exceeding half a percent. In contrast, European markets are witnessing a purely technical bullish rebound following a decline in the first half of the week, and European stock indices continue to consolidate near historical highs:The US Treasury market remains highly volatile, with yields rising across the entire maturity spectrum, frequently setting new local highs and approaching the peak levels recorded this year. Not since 2007 has the market witnessed such levels. Investors are selling bonds, though the intensity of selling varies depending on the maturity period. For instance, comparing the yields of 2-year and 10-year Treasury bonds:Since the third week of July, when robust data on the American economy began to emerge, yields across all maturity periods have been on the rise. However, long-term bonds have experienced more significant selling pressure, leading to faster growth in yields. In other words, the attractiveness of short-term bonds has increased relative to long-term bonds. Most investors had anticipated that a strategy of sequentially investing in a series of short-term bonds (lending for short terms and continually rolling over the investment) would generate higher overall returns than a strategy of purchasing long-term bonds (borrowing for a single long-term period).When investors believe that the Federal Reserve is planning to excessively tighten its monetary policy, they sell short-term bonds (expecting interest rate hikes) and instead buy long-term bonds, anticipating that the Fed's actions will prove to be a mistake and lead to an economic downturn or recession, along with corresponding fall in inflation rates. In such a scenario, buying long-term bonds becomes more advantageous compared to investing in a series of short-term bonds, as short-term interest rates are expected to decline in the future. Conversely, if investors believe that the Fed's will undershoot with policy tightening due to the strong economy's potential, they sell long-term bonds, expecting that the restrictive effect of high rates will be insufficient, leading to economy and inflation staying hot longer. In this scenario, a series of investments in short-term bonds appears more appealing, given the expectation that short-term rates will remain stable or potentially even increase.In the first case, the spread between long and short-term bonds will go lower, while in the second case, it will increase. Currently, investors seem convinced that the Federal Reserve's current policy outlook is insufficient to push inflation to its target level.Signs that inflation is likely to persist emerged yesterday after the release of ISM data in the services sector. Although the overall index roughly met expectations (52.7 points, with a forecast of 53 points), the input price index surged from 54.1 to 56.8 points (the first time in several months):This is indeed a very concerning signal that the Federal Reserve may once again be underestimating the potential for inflation.Today, the market braces for volatility related to the release of Nonfarm Payrolls (NFP) report, with expectations of modest job growth of around 200К and a 0.3% increase in wages on a monthly basis. In my opinion, the current rally in yields likely already factors in a strong NFP report, leading to a potential asymmetric reaction: a robust report may have minimal impact on the market, while weak job growth, especially with modest wage increases, could trigger a retracement in the recent bond market trend. Consequently, the U.S. dollar is also expected to experience a tangible downward correction in case of a dovish report.