August 2023: A Challenging Month for U.S. Government Debt

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August 2023 has proven to be a particularly difficult month for U.S. government debt, with over a week remaining. According to a Bloomberg index of Treasurys, the total return for this month stands at -1.9475%, marking one of the worst performances since February.

The rise in ten and thirty-year Treasury yields since April has contributed to this decline. Traders and investors have been reassessing the strength of the U.S. economy and factoring in higher real rates over an extended period. As a result, Treasury yields have been increasing, signaling a trend of selling off the underlying maturities.

It is worth noting that this challenging situation is reminiscent of the run-up to the regional banking crisis observed in February.

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Signs of Economic Overheating Drive Up Yields

In a recent note, macro strategist Will Compernolle discussed the signs of economic overheating that have led to an increase in yields. Compernolle explained that this jump in yields can be attributed to two main factors: the growing belief that the Federal Reserve will pause longer than originally anticipated, and modest increases in medium-to-long term inflation expectations.

Compernolle stated that the rise in yields observed in August aligns with previous forecasts, which predicted a potential upside risk to rates at the long end of the curve. However, he acknowledged that the curve has now shifted away from confidently pricing a soft landing, leaning more towards a “no landing” scenario.

Despite this shift, fed funds futures trading still suggests an expectation for rate cuts in the near future. Compernolle believes that rates at the shorter end of the curve still have room to rise.

Looking ahead, all eyes are on Federal Reserve Chairman Jerome Powell’s upcoming speech at the Jackson Hole symposium. Market participants hope that Powell’s remarks will provide insight into how policy makers view the long-term prospects of the U.S. economy.

Tuesday Afternoon Market Update

As of Tuesday afternoon, 10- and 30-year yields have retreated from their highest closing levels in years: November 6, 2007, and April 27, 2011, respectively. Concurrently, U.S. stocks are experiencing a mostly downward trend, following Monday’s declines: a month-to-date decrease of approximately 3.11% for Dow Industrials DJIA, 4.1% for the S&P 500 SPX, and 5.9% for the Nasdaq Composite COMP.

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