US Treasury yields continue to climb! Cleveland Fed President: Government and AI compete for funds, rate hike expectations "add fuel to the fire"

Cleveland Fed President Hammack said on Friday that the recent sustained rise in US long-term Treasury yields is the result of multiple factors, including strong US economic growth prospects, an ever-expanding scale of government debt, and rising investor expectations that the Fed will raise rates further. Speaking at a conference hosted by the Cleveland Fed on Friday, Hammack said: "I think there are multiple factors at play. One of them is that recently released economic growth data have been quite strong, and the market also expects this performance to continue." She also noted that the market's judgment on the Fed's next policy move is one of the important reasons driving long-term US Treasury yields higher. Investors are currently further pricing in the possibility that the Fed will continue raising rates. Fed officials voted unanimously last week to raise the benchmark rate by 25 basis points. The rate projections released after the meeting showed that, based on the median of officials' forecasts, the Fed expects to raise rates one more time before the end of this year. In recent days, several Fed officials have mentioned that the US economy is maintaining growth momentum and the labor market remains strong, and they believe these factors may mean further rate hikes are still necessary. Market expectations for a rate hike have also clearly heated up. According to federal funds futures pricing, investors currently see about a 65% probability that the Fed will raise rates in October. Hammack said bond investors are considering how the Fed may respond in policy terms to strong economic data, and what policy adjustments may need to be implemented next. In other words, if the economy continues to show resilience and inflationary pressures persist, expectations that the Fed will maintain a more restrictive monetary policy could continue to be reflected in long-term Treasury yields. In addition to economic growth and monetary policy, Hammack also listed US government spending and growing debt as important factors affecting long-term yields. Hammack, who worked at Goldman Sachs for about 30 years before joining the Fed in 2024, said investors have been closely watching the impact of government spending and the rising scale of debt. Notably, she also mentioned that the US government now has to compete for funds in financing markets with large-scale artificial intelligence investment projects. As AI infrastructure construction expands rapidly, data centers, power, and other related projects need to absorb large amounts of capital. When the government itself also needs to raise substantial funds by issuing Treasuries, competition for capital may intensify, thereby creating upward pressure on long-term interest rates. Therefore, in Hammack's view, the rise in long-term US Treasury yields cannot simply be attributed to a single factor, but is the result of strong economic growth, market expectations for further rate hikes, increased government debt, and rising capital demand acting together. As for why US Treasury yields have been climbing recently, Fed Chair Warsh's explanation last week has both similarities with Hammack's and certain differences. Like Hammack, Warsh believes that stronger economic growth and increasingly fierce competition for funds are important reasons driving bond yields higher. However, the two differ in their emphasis when explaining other driving factors. Hammack emphasized investors' expectations for further Fed rate hikes, while Warsh did not list monetary policy expectations as a main reason, instead citing geopolitical factors as another important explanation.