Powell says three factors are behind the bond yield spike

“Markets and analysts are seeing the resilience of the economy to high-interest rates. And they’re revising their view about the overall strength of the economy and thinking in the longer term, this may require higher rates.”

Second, Powell points to the fiscal side of the ledger.

“There may be a heightened focus on fiscal deficits,” he said, “concerns over fiscal deficits could be a longer-term factor.”

Powell has just returned from the latest World Bank and International Monetary Fund meetings in Morocco, where he heard that a lot of “countries are facing the need for substantial amounts of revenue .... [for] military, there’s also dealing with climate change”.

“It’s not a secret ... we know that we’re on an unsustainable path fiscally. It’s not that the level of the debt is unsustainable, it’s not, it’s that the path we’re on is unsustainable, and we’ll have to get off that path sooner rather than later.”

Powell then moved on to the third reason: better compensation for putting your money in bonds compared with equities, especially if the supply of bonds is bigger, pushing down their price. Prices move in the opposite direction to yields.

“Another one you hear very often is the changing correlation between bonds and equities.”

“If we are going forward into a world of more supply shocks rather than demand shocks, that could make bonds, a less attractive hedge to equities. Therefore, you need to be paid more to own bonds, and therefore, the term premium goes up.”

Powell said these changes all point to higher borrowing costs. “If you look at financial conditions indexes, they’re showing tightening and a lot of that is because of longer rates,” he said.

Whether or not the three factors were the markets trying to push the Fed into lifting rates is another story.

Powell said unlike the 1970s, financial markets are now far more likely to guess ahead of time what decisions the central bank is going to make.

“Over the course of the last 30 years, central banks have decided instead of being secretive, to be very transparent, and what that has meant is that markets move actually well in anticipation well before our policy moves.”

When it comes to longer-term bond yields though, Powell thinks it’s less about the market guessing what the Fed will do.

“Is it just because the market expects us to take further actions to tight monetary policy? It doesn’t seem to be principally about expectations of us doing more, it seems to me that the other factors are the more prominent ones.”