Bond yields have surged to levels not seen in over a decade, putting pressure on borrowers and causing turbulence in the stock market. While pinpointing the exact causes can be challenging, top strategists have identified four key factors driving this trend.

Record Breaking Treasury Yields

On Monday, the 10-year Treasury yield reached 4.336%, reaching its highest point since 2007. This surge marks the largest monthly increase since February. Likewise, the 30-year Treasury yield hit 4.457%, its peak level since 2011, with the biggest monthly increase since October, according to Dow Jones Market Data.

The Federal Reserve's Impact

One major catalyst behind this rise is the anticipation that the Federal Reserve will maintain higher interest rates for an extended period. The minutes from the central bank's July meeting reveal that most officials recognize "significant upside risks to inflation," signaling the potential for more rate hikes. Notably, the number of investors expecting an interest rate hike by year-end has risen by 10% compared to a month ago, as reported by the CME FedWatch Tool.

The Hawkish Stance of the Federal Reserve

"The answer is...the Fed. The back end of the curve has bought into the central bank's very hawkish tone of late," noted David Rosenberg, economist and president of Rosenberg Research & Associates. This alignment with the Federal Reserve's stance is a key driver behind the recent surge in bond yields.

With bond yields soaring and lingering uncertainty in the global economy, borrowers and investors must stay vigilant as they navigate these evolving market conditions.

The Fed's Balance Sheet Reduction and Interest Rates

The Federal Reserve's effort to reduce its balance sheet is a significant factor that impacts interest rates. The central bank aims to decrease its holdings of Treasury and agency debt by $95 billion each month. However, it has not fully achieved this goal thus far. Despite this, the latest weekly reduction was substantial, amounting to $62.5 billion. In fact, it was the largest decrease in the balance sheet since early April. As a result of these efforts, the Fed's total balance currently stands at $8.146 trillion, the lowest level observed since July 7, 2021.

Loan Growth Weakness

Another factor influencing interest rates is the weakness observed in loan growth. When banks become less willing to extend credit or when there is a decrease in loan demand, it can have a similar effect on interest rates as the Fed raising them directly. Recent data indicates that small banks experienced an overall loan growth rate of 1.9% as of August 9 on a seasonally adjusted basis. Remarkably, this represents the lowest level witnessed in nearly 12 years. Across the nation, banks have been reporting negative year-over-year loan growth rates since mid-July.

Impact of Economic Data

Economic data plays a crucial role in determining interest rates. Last week, the number of weekly jobless claims stood at 239,000, indicating that the economy remains strong. Furthermore, the second-quarter GDP growth rate surpassed expectations at 2.4%. Collectively, these factors provide justification for the Federal Reserve to continue raising interest rates.

The Strength of the U.S. Economy

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