(Bloomberg) -- Treasury Secretary Janet Yellen said that stronger than expected economic data spurred a repricing of expectations for interest rates that’s contributed to a selloff in US Treasuries.
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“When we see strong data — surprises to the upside on indicators to the performance of the economy — that suggests that the path of interest rates going forward is going to be a little bit higher than people expected,” Yellen said in an interview with CNBC Wednesday. She was responding to a question on what’s behind the slide in Treasuries in recent weeks that’s pushed yields higher.
Ten-year Treasury yields on Wednesday hit around 4.73%, the highest since last April. Interest-rate futures show traders have pared back expectations for the scale of Federal Reserve rate cuts for 2025.
Yellen also said that the so-called term premium has “begun to normalize,” referring to the extra yield that investors are thought to demand for buying longer-term securities rather than simply rolling over investments in short-term ones.
The term premium had been at “very low levels” for some time, she noted. But now that the economy has been doing well, it has begun to climb, she said.
While there hasn’t been much progress with regard to disinflation over the past couple of months, the Treasury chief said that she was convinced that price increases are on a downward path and that the labor market isn’t a source of price pressures.
Yellen said she hoped the incoming Trump administration will take the US fiscal deficit “seriously” and that the Treasuries market won’t get hit by the type of “bond vigilante” dynamic suffered decades ago — when investors were thought to demand more to buy government debt given concerns about the scale of public borrowing.
‘Bond Vigilantes’
“I would hate to see it come to the bond vigilantes — investors around the globe count on the US to be responsible in managing its fiscal policy, and not to rely on market responses to produce deficit reduction,” Yellen said.
While Trump and his Treasury secretary nominee Scott Bessent are counting on spending cuts to help shrink the deficit, Yellen doubted that there’s sufficient scope for much to be done outside of defense and entitlement programs.
“It’s hard to see how the math on that works,” Yellen said.