The August selloff in Treasurys began with worries about the fiscal outlook. It's now being driven by growing expectations rates won't return to recent lows.
An aggressive August selloff in long-dated Treasurys, which began with worries about the fiscal outlook, is now being driven by expectations U.S. interest rates likely won’t return to the past decade’s lows.
At the heart of Monday’s moves were questions about whether the so-called neutral rate of Federal Reserve policy, or level which is likely to prevail when the economy is operating at full strength and inflation is stable, has gone up and by how much. Economists refer to the real neutral rate of interest, after subtracting inflation, as r* or “r-star.” And it’s a topic that Fed Chairman Jerome Powell is seen as likely to delve into during his speech at the annual Jackson Hole symposium on Friday.
Rising U.S. deficits are among the factors which may be contributing to a higher neutral rate of interest. Another is better-than-expected U.S. economic growth, with the Atlanta Fed’s GDPNow forecasting model predicting a 5.8% growth rate for real gross domestic product in the third quarter — even after more than a year of Fed rate hikes. With the fed funds rate target now between 5.25%-5.
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