The main pressure is coming from weak government finances, a large supply of new debt and rising inflation. Global bonds edged higher on Wednesday, but they were still on track for their worst month in years.
Because higher energy prices can keep inflation elevated, inflation is another major concern, especially. Because they act as an anchor for global financial markets, government bond yields are closely watched. Because of the possibility of joint intervention by Tokyo and Washington, investors have been cautious about pushing the yen lower. Because expensive energy can keep inflation high, the elevated oil prices are important for bond markets.
The benchmark 10-year US Treasury yield was at 5.209% in early European trading on Wednesday. It was slightly below its highest level since June 2007. The yield was down 4.6 basis points on the day but was still on track to rise by more than 45 basis points in September. The Japanese yen rose 0.2% to 156.95 per dollar. It was heading for a 1.7% monthly gain. US crude was almost unchanged at $89.41 a barrel. Brent crude slipped 0.1% to $102.47 a barrel. The 10-year Treasury yield being close to its highest level since 2007 shows how significant the recent move has been.
Reuters reported these factors as key reasons behind the pressure on global bonds. Reuters reported. Energy costs have also stayed high as the seven-month-old US-Israeli war on Iran continues to affect oil supplies and prices. That would be its biggest monthly rise in about two years, showing how sharply borrowing costs have increased. Bond yields and bond prices move in opposite directions, so rising yields reflect continued pressure on Treasury prices. Investors are worried about the financial condition of governments and the amount of debt they need to issue. A large supply of government debt can put pressure on bond prices, pushing yields higher. They also provide a reference point for investors deciding how attractive stocks and other riskier assets are. Both were still heading for monthly gains. The gains are linked to concerns that the ongoing Middle East war could cause long-lasting supply disruptions. Higher inflation can increase concerns that interest rates may need to remain high, which can push government bond yields higher. This creates another link between the Middle East conflict, oil prices, inflation and Treasury yields. US Treasury yields are rising as investors deal with heavy government borrowing, large debt issuance, inflation concerns and high energy prices. The pressure is also visible in major European and Japanese bond markets. So far, stocks have remained more resilient than bonds, helped by earnings growth, economic strength and AI enthusiasm. But investors are watching whether higher borrowing costs and elevated oil prices eventually put more pressure on stocks and the wider global economy.
Europe’s STOXX 600 was up 0.6% at 0812 GMT on Wednesday. However, the index was still heading for a 1.4% monthly loss and was broadly unchanged for the quarter. MSCI’s broadest index of Asia-Pacific shares excluding Japan rose 0.3% but was heading for a 1.1% monthly fall. Japan’s Nikkei jumped 1.9% and was on track for a 0.6% monthly gain, although it was still set to fall 4.7% for the quarter. South Korea’s Kospi was headed for a 0.3% monthly gain but a 19% quarterly decline. Nasdaq futures rose about 0.2%. S&P 500 futures gained nearly 0.3%. The euro traded just above a 16-month low at $1.1346. It was heading for a 2.3% monthly loss. The British pound rose 0.2% to $1.326 on Wednesday. Despite that daily gain, sterling was still heading for a 2.1% monthly loss.
Carlo Franchini, head of institutional clients at Milan-based Banca Ifigest, said current yield levels are becoming significant. He warned that investors could start considering moving money away from equities if borrowing costs remain high, according to Reuters. However, he said he was not yet taking profits on stocks. Lower tensions could help bring oil prices down and reduce some of the pressure on bond yields, according to Franchini. Strong corporate earnings, a solid global economy and continued enthusiasm around artificial intelligence have helped support stocks, according to Reuters. Citi’s Asia-Pacific trading strategy head Mohammed Apabhai said the resilience of equity markets was surprising given the rise in bond yields. The currency has been pressured by the global energy shock and rising political risks in Europe, according to Reuters.
He expects equities could remain supported into October if tensions around the Strait of Hormuz ease. Despite the sharp rise in government bond yields, stock markets have remained broadly resilient. This has meant that investors have not moved away from equities as sharply as the rise in bond yields might have suggested.
Because it is used as a benchmark for mortgage rates and many other borrowing costs, the 10-year Treasury yield is especially important. China’s blue-chip CSI 300 index gained 0.3% on Wednesday. The index was on course for a 12% quarterly decline. That would be its biggest quarterly fall since the height of China’s COVID-19 lockdowns. 10-year German government bond yields reached their highest level in 17 years this week. They were heading for a rise of about 70 basis points for the quarter. 10-year French government bond yields reached an 18-year high and were on track to rise by about 120 basis points for the quarter. Japan’s 10-year government bond yield remained close to multi-decade highs. It was heading for a 38-basis-point increase during the quarter. The US dollar was on track for a monthly gain of about 2%. The dollar was down just 0.1% on Wednesday, but remained stronger for the month. Earlier reporting noted: The 10-year Treasury yield was at 5.24% on Tuesday. The 30-year Treasury yield was near 5.56%, while the 2-year yield was around 4.93% on Tuesday.
Apabhai said in a Citi note cited by Reuters. The rise has added pressure to the bond market as investors demand higher returns to hold longer-term US government debt, according to Yahoo Finance. Treasury yields also influence mortgage rates and corporate borrowing costs. This means the recent rise in yields is not limited to the bond market. It can affect borrowing costs for households and companies as well. He linked some of the optimism to nominal GDP growth and expectations for stronger corporate earnings. He added that US equity markets were responding to higher yields, but the impact was being seen outside the technology sector more clearly. The rise in yields is not limited to the US. This shows that the pressure on government bond markets is happening across several major economies rather than only in the US. Higher US Treasury yields have helped support the dollar by making US assets more attractive to investors. Other Treasury yields are also staying high. Oil prices have remained elevated, increasing concerns that inflation could stay high for longer. When investors expect higher inflation, they can demand higher yields on government bonds.
However, it was still struggling to recover from a one-year low reached earlier in the week. Earlier reporting noted: Longer-term Treasury yields have reached multidecade highs in recent weeks. Earlier reporting noted: Higher oil prices are one of the biggest reasons Treasury yields are rising.
The 2-year US Treasury yield fell 1.9 basis points to 4.870% on Wednesday. Even after Wednesday’s fall, the 2-year yield was still more than 50 basis points higher for September. The ongoing Middle East conflict has kept oil prices high, adding to concerns about future inflation. Higher inflation can also make investors expect interest rates to stay higher for longer, putting further pressure on bond yields.
The decline came after New York Federal Reserve President John Williams pushed back against expectations of an earlier tightening of monetary policy.
