Bond yields are rising because essentially no one wants to buy them, says one investment expert.
Forget short-volatility instruments and other suggested culprits of the recent equity market sell-off, Peter Toogood, chief investment officer at financial advisory firm Embark Group, told CNBC Wednesday. Spiking bond yields, which spooked the equity markets last week, are a result of a decreased willingness to take on countries' debt as central banks move away from doing it themselves.
"Everyone's citing the XIV (short volatility) trade as being the reason it happened — how about the failing bond auctions?" Toogood asked. "The bond auction failed, basically. People didn't want to step up at that point. How about this old idea that maybe the Treasury yield has to go up because it has to be higher to attract capital?"
Yields on U.S. Treasurys have touched multi-year highs after nearly three decades of a bond bull market, which up until late 2017 saw a consistent downtrend in yields. The benchmark 10-year U.S. Treasury yield is currently at 2.835 percent, after clipping a four-year high of 2.902 percent Monday. Bond yields move inversely to prices.
The 10-year will surpass 3 percent, Toogood predicted. "I think it will go past that, and for the wrong reasons. Because they're issuing a lot of debt, and people want more money. They want to be paid a higher yield to take that debt."
He referred in particular to the U.S., which this year will issue a trillion dollars in bonds. The debt issuance is required in part to account for massive government spending and decreased revenue thanks to broad tax cuts and a new $300 billion spending bill. The tax cuts are projected to add $1.5 trillion to the national deficit.