US Treasury yields continue to rise! Cleveland Federal Reserve President: Government and AI compete for funds, fueling rate hike expectations

Zhitong Finance APP has learned that Cleveland Federal Reserve President Loretta Mester said on Friday that the recent sustained rise in U.S. long-term Treasury yields is the result of multiple factors, including the robust outlook for U.S. economic growth, the expanding size of government debt, and rising expectations among investors for further Federal Reserve rate hikes.

Mester stated at a conference hosted by the Cleveland Fed on Friday: "I believe multiple factors are at work. One of them is that recently released economic growth data has been quite strong, and the market is also expecting this strong performance to continue."

She also pointed out that the market’s expectations about the Federal Reserve’s next policy move is also an important reason driving long-term U.S. Treasury yields higher. Currently, investors are further pricing in the possibility that the Fed will continue raising rates.

Last week, Federal Reserve officials voted unanimously to raise the benchmark interest rate by 25 basis points. The rate forecasts released after the meeting showed that, according to the median forecast of officials, the Fed is expected to raise rates once more before the end of this year.

In recent days, several Federal Reserve officials have noted that the U.S. economy is maintaining its growth momentum and the labor market remains strong. They believe these factors may suggest it will still be necessary to raise rates further. Market expectations for rate hikes have clearly strengthened as well. According to federal funds futures pricing, investors currently see about a 65% probability of a Fed rate hike in October.

Mester said that bond investors are considering how the Federal Reserve may respond to strong economic data and what additional policy adjustments might be needed next. In other words, if the economy continues to show resilience and inflationary pressures persist, expectations for the Fed to maintain a tighter monetary policy could continue to be reflected in long-term Treasury yields.

Aside from economic growth and monetary policy, Mester also listed U.S. government spending and the rising level of debt as important factors influencing long-term yields. Mester, who worked at Goldman Sachs for nearly 30 years before joining the Federal Reserve in 2024, said investors have been closely watching the impact of growing government spending and debt levels.

Notably, she also mentioned that the U.S. government now has to compete for funds in the financing market with massive artificial intelligence investment projects. As AI infrastructure construction rapidly expands, data centers, power facilities, and other related projects require huge amounts of capital. When the government itself also needs to raise large sums by issuing Treasury bonds, competition for capital could intensify, placing further upward pressure on long-term rates.

Therefore, in Mester’s view, the rise in long-term Treasury yields cannot be simply attributed to a single factor, but is the result of the combined effects of strong economic growth, market expectations of further rate hikes, increasing government debt, and rising capital demand.

Regarding why U.S. Treasury yields have been climbing recently, the explanation offered last week by Fed Chairman Christopher Waller was both similar to and somewhat different from Mester’s. Like Mester, Waller believes that stronger economic growth and increasingly fierce competition for capital are important drivers of higher bond yields.

However, in explaining other contributing factors, the two differ in emphasis. Mester highlights investor expectations for further Fed rate hikes, while Waller does not list monetary policy expectations as a primary reason and instead points to geopolitical factors as another important explanation.