Why U.S. Government Borrowing Costs Hit a 24-Year High in October
The U.S. 30-year Treasury bond yield stood at 5.6057% on 1 October, after falling 3.33 basis points that day. It had recently touched its highest level since 2002, according to Reuters.
Two terms help here. Treasuries are bonds the U.S. government sells to borrow money. A basis point is one hundredth of a percentage point, so that day's drop was about 0.03 percentage points.
A bond's yield is the yearly return it pays, measured against its price. Yield and price move in opposite directions, like a seesaw. When prices fall, yields rise. A 5.6% yield means bond prices had already dropped a lot from their earlier levels.
The move was not limited to one maturity. Reuters reported on 2 October that U.S. Treasury yields had reached a 24-year peak. The benchmark yield had eased to around 5.26% as yields across the range declined. The headline on that report referred to Treasuries' worst quarter since 1994, which places the rise in a longer frame than one week of trading.
Long-term government yields matter well beyond the government. They act as a floor under many fixed-rate loans, so when they climb and stay high, mortgages and company borrowing get more expensive. For people who already own bonds, the same move lowers what those bonds are worth, even though newly issued bonds pay more.
Auction data pointed in a similar direction. Reuters reported on 7 October that the 30-year yield had hit a fresh 24-year high. In the same period, the U.S. 10-year Treasury auction priced at 5.3%, below the expected rate at the bid deadline. At an auction, the yield is set by the bids buyers submit.
In my view, a result below expectations suggests buyers at that auction were more eager than the market had assumed. That is a different signal from a yield falling during ordinary trading. Auctions and daily trading can point in different directions, and one auction is a narrow measure of demand.
The dollar moved the other way. The Wall Street Journal reported on 15 October that the WSJ Dollar Index fell 0.32% to 97.26. The headline flagged higher chances of Fed rate hikes as a possible weight on Asian currencies. The Fed is the U.S. central bank, and a rate hike means raising its benchmark interest rate.
Higher rates usually support a currency, so a stronger dollar and weaker Asian currencies only fit together if the rate outlook hurts those markets in another way, such as through money flows or appetite for risk. The index moved only a little.
Oil is another factor. The Wall Street Journal reported that U.S. Treasury yields and the dollar declined due to falling oil. Lower oil prices ease inflation, the steady rise in what things cost. That reduces the pressure on central banks to keep rates high, which lowers expected short-term rates and pulls down longer yields. The chain also runs in reverse, which is why energy prices appear so often in recent rate and currency coverage.
Geopolitics has affected regional currencies too. The Wall Street Journal reported on 14 September that the Singapore dollar weakened amid escalating Middle East conflict. Threats to energy supply tend to hit the currencies of countries that buy energy from abroad, and they raise the cost of imported inflation. That fits the oil link described above.
Taken together, the bond market tested multi-decade highs in yield in early October, then gave back some of that move as oil softened and auction demand held up. The numbers are narrow: a few basis points on one day, a benchmark near 5.26%, and a 10-year auction at 5.3%. In my view, the useful questions are whether the pullback holds as oil prices and expectations for Fed policy shift, and whether auction demand stays firmer than the market expects.
