Over the span of just two trading days, Treasury prices have collapsed. Yields are suddenly surging again. So far, large-cap stocks are shrugging this dynamic off entirely, while small-cap stocks, which are particularly sensitive to the cost of capital, continue to hemorrhage (as they have since 2021).
So why are Treasury yields spiking? The answer isn’t immediately clear.
Consider that economic data has largely been getting softer. ISM manufacturing remains below the 50 level, and the economic surprise index is at its lowest point.
Based on this, I think there are three reasons for why yields are suddenly surging, and each is equally plausible.
3 Potential Reasons Treasury Yields Are Up
The first is that, suddenly, the economy is reaccelerating. I find this unlikely, but there is an argument to be made for this given just how low the economic surprise index has gotten. In other words, if investors continue to lower expectations, there could be a scenario in which the economy surprises to the upside.
The second is that this is entirely because of Japan. I continue to believe that Japan will have to sell Treasurys to buy up the yen, in turn sparking a short squeeze. This would spark the reverse carry trade and a selloff in risk-on assets that would force investors to flock to Treasurys for safety. This could be what is happening here given just how much weaker the yen has become.
The third reason is the simplest, and perhaps the correct one. Maybe the selloff in Treasurys and corresponding spike in yields has everything to do with the presidential debate. After the debate, former President Donald Trump’s odds for winning the presidency surged. Perhaps the market believes that Trump’s tax cuts, with continued unabated government spending, would put the U.S. government bond market into an even more precarious position. I think this is plausible, although a second term for President Joe Biden would also see government debt increase. Debt will go up, no matter who is president.
The Bottom Line
No matter what is causing the spike in Treasury yields, the important question is whether are seeing just a temporary dislocation or the start of something bigger.
I think this could be a buying opportunity for Treasuries but recognize this is a volatile environment that can result in sharp moves. And Treasurys may again be at the heart of whatever comes next.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
