Former U.S. Treasury Secretary Lawrence Summers cautioned that the recent run-up in 10-year yields may have further to go, and that pressures are building to keep those benchmark rates much higher than experienced over the past two decades.
"I don't particularly see the current level of longer-term rates as any kind of peak," Summers said on Bloomberg Television's Wall Street Week with David Westin.
Summers said that conclusion is based in part on expectations for bigger government budget deficits "to come into focus" for investors over time.
Ten-year US Treasury yields this week approached the levels reached in October, when they hit the highest since 2007, and were at 4.19% as of 10:34 a.m. in New York.
Over the past two decades, they've averaged about 2.90%, according to data compiled by Bloomberg.
3 Factors at Play
Summers, a Harvard University professor and paid contributor to Bloomberg TV, said he thinks of 10-year yields as offering compensation for three distinct factors.
Inflation, which he said is likely to trend at a faster pace than in the past, perhaps 2.5%.
A real return, which could be 1.5% to 2% over time when thinking of the government's increasing borrowing needs — driven by the need for more defense spending, likelihood of some Trump administration tax cuts getting extended and higher average interest costs on outstanding debt.
A term premium, which is the compensation investors get for buying a longer-term security rather than rolling over investments in short-term ones.
Typically this has averaged about 0.75 to 1 percentage point, Summers said.
