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Treasury yields have been climbing steadily, particularly on the long end of the curve, sparking renewed chatter from macro bears who see this as the harbinger of an impending crisis. If you’ve followed my content for a while, you won’t be surprised when I say: this isn’t the disaster they’re hoping for. Let’s break down why yields are rising, debunk some common macro bear arguments, and explore the dynamics behind this shift.

Why Are Yields Rising?

At its core, rising yields boil down to one thing: investor expectations. Specifically, expectations for future growth and inflation are now higher than they were just months ago. As markets anticipate stronger economic performance, this is being priced into the long end of the yield curve.

But there’s more to it than just investor sentiment. Understanding this phenomenon requires addressing two pervasive myths propagated by those forecasting doom: the “debt crisis” narrative and the “lack of demand for treasuries” argument.

Debunking the Debt Crisis Myth

One popular theory among macro bears is that the U.S. is on the brink of a debt crisis, fueled by the notion that our national debt is unsustainable. This view ignores some fundamental principles of monetary and fiscal policy in the United States.

As the release of the United States’ fourth-quarter GDP figures draws near, it has become increasingly evident that forecasting the rate of change for this metric remains a significant challenge. Current projections even within the Federal Reserve’s own models show considerable divergence. For instance, the Atlanta Fed’s GDPNow model currently predicts growth at 3.3%, whereas the New York Fed’s equivalent model estimates a much lower rate of 1.8%.

CPI for October came in at 2.6% today, inline with forecasts but persistent inflation remains a key narrative as we finish out the year. Today's 2.6% print aligns closely with projections from our DeepMMT 2 model (more to come on DeepMMT 2 soon) and we anticipate elevated CPI readings through November and December, with modest reductions expected to emerge in early 2025.

The Fed’s recent rate cut on November 7 has been incorporated into the model. After a two-day meeting, the Federal Open Market Committee noted that “economic activity has continued to expand at a solid pace.” The committee lowered the target rate range to 4.50% to 4.75%, as anticipated, with a unanimous decision.

Expectations of another 25-basis-point rate cut on December 18 have also been factored into our model. These projections, derived from the 30-Day Fed Funds futures, currently reflect a 63% probability of a target range of 4.24% to 4.50% for the upcoming decision.