TLT•Attempts to cap or reverse the rise in U.S. Treasury yields are likely to fail unless economic growth weakens or inflation pressures ease, conditions that do not appear imminent, according to Bob Doll, chief investment officer at Crossmark Global Investments.
The U.S. Treasury announced last week it would double the size of its quarterly repurchases of longer-dated bonds after the 30-year yield reached its highest levels in nearly two decades.
Doll said the move was unlikely to counter the fundamental forces pushing borrowing costs higher, including resilient economic growth, persistent inflation and worsening government finances. Efforts by policymakers to suppress yields without addressing those underlying factors risk undermining confidence in the U.S. dollar, Doll said.
"The upward pressure on rates and yields will only reverse if economic activity weakens and/or inflation pressures recede," he said.
Inflation remains a concern, partly because of oil prices, but has yet to become a meaningful constraint on economic activity. Oil supplies from the Middle East have continued to flow despite the ongoing conflict in the region, allowing investors to largely look through the risk for now.
Still, if inflation remains above target for a prolonged period, investors may demand greater compensation for inflation risk when buying government debt, making it harder for Treasury officials to contain borrowing costs, Doll said.
"The longer above-target inflation persists, the greater the odds that bond investors will eventually fade from the scene and the vigilantes will return. This shift may accelerate if the authorities continue to pursue unorthodox policies in an attempt to cap rising Treasury yields while downplaying the inflation and public debt risk," he said.
