For the first time in nearly 16 years, the yield on 10-year US government bonds has risen above 5 percent. This milestone takes us back to 2007, during the peak of the subprime mortgage crisis when the yield crossed the 5 percent threshold.
On the recent morning, the rate on 10-year Treasury bonds hit 5.008 percent. This shift is in response to growing concerns among investors that the US Federal Reserve will maintain higher interest rates for an extended period due to persistent inflation and the resilience of the US economy. Federal Reserve Chair Jerome Powell had hinted at this last week.
The benchmark 10-year Treasury yield reached 5.012 percent, marking its highest level since 2007.
This increase is a result of a robust US economy, leading investors to anticipate prolonged high-interest rates. The combination of these rising yields and the potential for a broader conflict in the Middle East has dampened market sentiment at the start of a week filled with major corporate earnings and crucial data releases. It has also led to a decline in global shares, pushing them to seven-month lows.
The 10-year Treasury yield’s climb to 5.012 percent, an increase of 8.6 basis points on the day, reflects the extent of the global bond sell-off. This sell-off is driven not only by mounting government debt and increased bond supply worldwide but also by an uncertain economic outlook, which has prompted investors to seek a higher premium for holding longer-dated bonds.”From an economic perspective, 5 percent is just another number. However, for investors, it carries significant resonance,” remarked Chris Scicluna, the Chief Economist at Daiwa Capital.While this surge in bond yields has tightened monetary conditions without direct intervention by central banks, it has allowed the Federal Reserve to signal that it will likely maintain its current policies at the upcoming policy meeting.
In fact, futures indicate a roughly 70 percent chance that the Federal Reserve has completed its tightening cycle and is even considering rate cuts from May next year.
The rise in bond yields has also posed challenges to equity valuations, resulting in declines across major indices over the past week. The VIX, often referred to as the “fear index” for US stock market volatility, reached its highest level since March.
The MSCI All-World index recently declined by 0.2 percent, marking its lowest point since late March when turmoil within the global banking sector began to subside. In Europe, the STOXX 600 also experienced a 0.5 percent decrease, reaching seven-month lows. Real estate stocks, sensitive to interest rates, dropped to their lowest levels since 2012.Concerns about the ongoing conflict in the Middle East are also weighing on investors’ minds. Over the weekend, Washington issued warnings about significant risks to US interests in the region as Israel continued its operations in Gaza, and border clashes with Lebanon escalated.
This period sees mega-cap corporations such as Microsoft, Alphabet, Amazon, and Meta Platforms reporting their earnings. IBM and Intel are also on the earnings schedule. Profits are expected to be supported by strong consumer demand, with US gross domestic product figures anticipated to show annualized growth of around 4.2 percent in the third quarter, possibly even reaching nominal annualized growth as high as 7 percent.
The robust performance of the US economy has bolstered the dollar, although the possibility of Japanese intervention has capped its rise, for now, keeping it at approximately 150.00 yen. The dollar is currently trading at 149.93 yen, just below its recent peak of 150.16.In Japan, yields are also on the rise, as there is speculation that the Bank of Japan is discussing further adjustments to its yield curve control policy, which may be announced at its policy meeting on October 31.The euro has experienced a slight increase to $1.0607, while the Swiss franc, which has benefited from safe-haven flows over the past couple of weeks, remains steady at 0.8924 per dollar. It is slightly weaker against the euro at 0.94645 per euro.
The European Central Bank (ECB) is set to meet later this week, and it is widely expected to maintain its interest rates at 4 percent. Investors will be keen to discern any signals from ECB President Christine Lagarde regarding how the increase in global bond yields might impact the euro zone’s monetary policy outlook.
Gold, which reached its highest value since May last week, remains relatively stable at around $1,980 per ounce. Oil prices have slightly dipped, with Brent crude down 0.26 percent at $91.80 per barrel. Nevertheless, the primary news in the oil market pertains to Chevron’s announcement that it has agreed to acquire Hess for $53 billion in stock.