The term premium is up one percentage point since late July, see chart below showing that the ongoing rise in long rates is driven less by changing Fed expectations and more by:
1) The US sovereign downgrade
2) Japan exiting YCC
3) Fed QT
4) Fewer dollars for China to recycle in a falling exports environment
5) The US budget deficit
6) The large stock of T-bills and the Treasury’s intention to increase auction sizes.
Looking ahead, the real risk to the economy, including financial stability, is if weak economic data doesn’t result in falling long-term interest rates. The Treasury market’s reaction to the employment report next week will be very important and likely set the tone for markets in Q4.
Source: Bloomberg, Apollo Chief Economist
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