The recent steepening of the yield curve, particularly at the long end, has been a topic of interest among market participants. While some may attribute this phenomenon to issues of excessive long-end issuance, our analysis suggests that macro factors are the primary drivers of higher yields at the long end.

In our view, the drivers of higher yields at the long end can be broadly categorized into three main areas: capital expenditures (capex), productivity, and real risk premium plus persistent macro supply shocks. These factors have contributed to a shift in the yield curve, with longer-term maturities offering higher yields to compensate for inflation and other risks.

Capital expenditures, or capex, refer to the investments made by businesses in new assets, such as equipment, software, and buildings. As companies invest in these areas, they require more funding, which can lead to higher yields at the long end of the curve. Productivity, on the other hand, refers to the efficiency with which goods and services are produced. A rise in productivity can lead to higher output and lower costs, both of which can contribute to higher yields at the long end of the curve.

Real risk premium plus persistent macro supply shocks is a term used to describe the additional return required by investors to compensate for inflation and other risks. When economic growth is strong, inflation tends to rise, leading to higher real interest rates and steeper yield curves. Persistent macro supply shocks, such as those caused by geopolitical tensions or natural disasters, can also lead to higher yields at the long end of the curve.

While the recent suppression of volatility and yield upside may provide some relief to concerns about excessive long-end issuance, it is unlikely to meaningfully reset levels in the long end of the curve. Instead, these factors will continue to drive higher yields at the long end, potentially suppressing volatility and upside for a time.