Figure 1. Recent Uprising of the Long End of the Yield Curve

The time required to traverse the peak of the Fed rate cycle has lengthened(higher-for-longer), owing to the adaptation of the U.S. economy to elevated yields and its subsequent robust growth. Concurrently, the long end of the yield curve continues its upward trajectory (see Figure 1).

I do not attribute this phenomenon to policy channels, particularly since long-term yields have surged more dramatically than their medium-term counterparts. This could be due to expectations of a decline (or increase) in the long-run value of money (or long-run neutral inflation). Alternatively, investors may withdraw their funds from the bond market and await an opportune moment to invest in riskier assets as the Fed’s rate-hiking cycle is expected to conclude.

The increase in long-term yields benefits the Fed, as it aids them in achieving their inflation targets. However, if these yields escalate excessively, it can compromise financial market stability. In this case, the Fed may be compelled to prematurely lower its target rate.

Figure 2. Abrupt Increases in Global Liquidity from Q1:2020

Notes: Global liquidity index(total credit to non-bank borrowers by currency of denomination). All indices are normalized to have 100 in Q1 2010.
Source: BIS statistics

Since May 2020, we have observed rises in inflation and long-term yields. Interestingly, these developments align with predictions from my previous paper (Lee and Kang, 2023). In that paper, we found that when people expect global liquidity to increase in the long run, global inflation and global long-term yields also rise jointly. As shown Figure 2, global liquidity experienced a sudden increase starting from Q1 2020. I suspect that this surge in global liquidity is one of the factors contributing to the recent uptick in inflation and long-term yields.