What does the chart show?
 
This chart shows the yields on treasuries reaching their highest levels since the Global Financial Crisis, fuelled by dramatic sell offs in the past couple weeks. US government-issued debt securities are typically regarded as safe-haven assets with reliable returns, however in recent years this has not been the case. In the past couple of years, central banks have responded to inflationary pressures with an unprecedented series of rate hikes, leading to a dramatic surge in yields. Yields move inversely with prices, so these yield spikes have coincided with steep drops in prices, damaging portfolios containing fixed income assets. Despite the anticipation of a reversal of this trend and promising returns in 2023, the resilience of economies, ongoing debt issuance, and a growing deterioration of confidence in US fiscal responsibility have resulted in a continual rise in yields. Most recently the US payrolls released on Friday (6 October) reported 336,000 additional Nonfarm jobs in September, more than doubling expectations. In response, yields on 30-year treasuries surpassed 5% for the first time in 16 years, as investors were yet again taken off guard by the strength of the economy amidst a high interest rate environment. 

 Why is this important?

 Rising yields pose not only a threat to portfolios containing fixed income assets by reducing their value, but also significantly tighten financial conditions. Given that banks hold large proportions of government debt, a devaluation of these assets imposes substantial strain on their balance sheets, limiting their capacity to lend, and in turn exerting pressure on the broader economy. Therefore, the recent surge in yields will prompt the Federal Reserve to consider whether additional rate hikes are required given the risks that emerge if conditions tighten excessively, and a recession is triggered. This was echoed by hawkish Fed member Loretta Mester who stated these moves were “certainly going to feed into” Fed rate decisions. The rise in long term bond yields in recent weeks does however now present attractive valuations for investors, given the extent to which bond prices have fallen, with real rates now also very much in positive territory. As a result, in addition to increasing exposure to safe-haven government bonds in short maturities in recent months, we are actively seeking opportunities to extend duration as we enter the latter stages of the rate cycle. The focus is now on the upcoming CPI report, due to be issued this week, to gauge what decision the Fed may take at their next meeting in November.