Here’s Janet Yellen’s explanation for the treasury turmoil, as she dismisses the deficit as the cause of the rise in bond yields.

Janet Yellen, the U.S. Treasury Secretary, contends that the recent increase in long-term bond yields in the U.S. is a reflection of the country’s economic strength rather than its expanding fiscal deficit, according to Bloomberg. Yellen dismisses the idea that the rise in yields is a result of the U.S. budget deficit. She suggests that the U.S. economy continues to display significant strength, potentially indicating the need to keep interest rates higher for a longer period. However, the surge in yields of benchmark Treasury bonds could potentially impede economic growth and lead to higher borrowing costs for the U.S. government. Federal Reserve Chair Jerome Powell also acknowledges the tightening of financial conditions caused by the rise in yields and suggests that the economy’s ability to withstand higher borrowing costs may be playing a role. The escalating federal deficit has led to reliance on hedge funds, mutual funds, and pension funds as buyers of debt, as major purchasers like the Fed and other central banks have reduced bond buying. These new debt purchasers may demand higher returns due to their sensitivity to prices. Consequently, the iShares 20+ Year Treasury Bond ETF has experienced significant declines in value, falling by 15% in 2023 and currently trading at levels last seen in July 2007.