Christopher Waller said inflation expectations are "well anchored" and cited research putting the cost of Treasuries losing their convenience yield at 50 to 70 basis points. The 10-year yield sat near 5.22%, about 14 basis points below last week's 24-year high.
A Federal Reserve governor offered an explanation on Tuesday for the long-bond selloff that also explains why the Fed may have limited control over it.
Speaking at an event in Mumbai, according to a news report of his remarks, Fed Governor Christopher Waller said rising yields do not reflect fear of inflation. "Inflation expectations are well anchored, so all of the build-up (in yields) is not coming from an inflation premium," he said. "That's not where it's coming from. So it is a factor of real growth."
He then pointed to a second force. Citing academic research, Mr. Waller said Treasuries may have lost some of their standing as the world's safe asset over the past two years, reducing demand for them. "That's another reason your rates are going to go up if you lose that convenience yield," he said. "And it's not a trivial sum. It could be like 50 to 70 basis points."
Where yields stand
The 10-year Treasury yield was about 5.22% in early afternoon trading, down about 2 basis points on the day. That leaves it about 14 basis points under last week's intraday peak near 5.36%, a level not seen in roughly 24 years. The 30-year yield eased about 3 basis points to about 5.57%.
The decline began overnight in Asian trading, before Mr. Waller spoke.
Mr. Waller also said changes in the overnight rate the Fed controls are "not driving the 10-year yield much." He said spending on artificial intelligence, including data centers, could support demand for another two or three years, while meaningful productivity gains remain "a few years out." The Fed raised rates in September, and he has said recently that further increases are likely.
Three ways to split the same rise
Mr. Waller's account is one of three offered in the past two days for the same move.
BlackRock's research arm says the 10-year yield has risen about 110 basis points this year, to about 5.25%, "driven mainly by higher real interest rates rather than inflation expectations or term premium." It moved short-term Treasuries to overweight and long-term Treasuries to neutral, and said the 160 basis points of Fed tightening priced for the next 12 months is overdone.
DZ Bank looks at the same market and estimates the 10-year term premium, the extra yield investors demand for holding long bonds instead of rolling short ones, at 91 basis points, its highest since 2014.
BlackRock treats the rise mainly as a return on real rates. DZ Bank treats much of it as compensation for risk. Mr. Waller's account sits between them. He points to growth, but the convenience-yield research he cited describes a cost that is neither inflation nor growth.
What each reading implies for policy
If yields reflect real growth, a stronger economy is doing some of the Fed's tightening for it. LSEG data now put the chance of an October increase near 19%.
If yields reflect a lost safe-haven premium or a higher term premium, raising short-term rates would do little to bring the 10-year down. That is the point Mr. Waller made about the overnight rate.
Market implications
One reading is that the selloff is a growth-and-capital repricing that hikes would not reverse. Inflation expectations are steady, AI investment is supporting demand, and the main real-rate measure has done most of the moving.
A second reading is that investors are charging more to lend to the U.S. government. Research a governor cited puts up to 70 basis points on lost safe-haven demand. Add a term premium at a 12-year high and large deficits, and the cost may be one the Fed cannot easily remove.
What to watch
Wednesday's September consumer-price report tests the "not inflation" claim directly. Treasury's auctions of 20-year bonds and five-year inflation-protected notes next week, and the Fed's Oct. 27 to 28 meeting, are the next reads on demand for long debt.