The yield on the US 10-year Treasury note rose above 5.2% on Tuesday, approaching its highest level since 2002. Investors expect more Federal Reserve tightening to tackle energy-driven inflation, which is being fuelled by the ongoing US-Iran tensions.
The world’s sovereign bond markets are expected to have their worst month in years due to rising energy costs and economic growth from AI. Investors are preparing for longer periods of higher interest rates.
The speed at which bonds are losing value is rattling markets. The 10-year Treasury yield, already above 5% for the first time in 19 years, is poised for the biggest monthly jump since 2022, with a rise of around 50 bps.
How Fast Have Yields Climbed?
The 10-year bond yield has moved up by nearly 50 basis points (bps) or 0.499% in the last 30 days, and by 1.103% over the last year. The two-year US Treasury yield has surged over 0.604% or 60 bps so far in September. It is poised for the biggest monthly jump since early 2023.
The pain is not limited to the US. Other developed countries, including France, Germany, Britain and Australia, are set for their biggest monthly jumps since March, when the Iran war got underway. Japanese government bond yields are also near multi-decade highs.
Iran Talks Keep Oil on the Boil
Markets were on edge after President Trump rejected Tehran’s proposal, which was identical to a previous memorandum of understanding, to reopen the Strait of Hormuz and end the war. Iranian officials reportedly questioned the likelihood of an agreement being reached before the US midterm elections in November. Oil prices continued to rise as a result.
Is Supply Also Part of the Problem?
Surging oil prices will continue to put pressure on yields, as inflation remains a big threat. There is another factor too. The federal government is increasing debt to address a large deficit, and businesses are investing heavily in artificial intelligence infrastructure. This combination has notably increased bond supply, which is also pushing yields higher.
Wall Street Feels the Heat
US stocks fell on Monday. The Dow Jones Industrial Average (DJI) dropped 0.7%, the S&P 500 (GSPC) declined by about 0.8%, and the tech-heavy Nasdaq Composite (IXIC) fell by 0.9%. US stock futures edged lower on Tuesday after the major averages declined in the previous session, pressured by a rise in Treasury yields.
Investors are now bracing for a busy week of significant economic announcements, such as the PCE inflation report and monthly jobs data. Strong economic data, worsening fiscal conditions and rising US government debt have all weighed on the Treasury market in recent weeks.
Why Should You Care?
Sovereign yields serve as a crucial reference for global markets. They influence investment in riskier assets and act as benchmarks for mortgages and corporate borrowing. Higher rates put pressure on government, corporate and household finances.
The valuation that a stock enjoys in the market depends a lot on where the yields are headed. Rising bond yields negatively impact the valuations of high-growth companies particularly AI firms, by reducing the present value of their future cash flows. As the risk-free rate rises, the discount rate applied to cash flows increases, making future earnings less valuable today.
Disclaimer: This article is for informational purposes only and should not be treated as investment advice. Please consult a qualified financial advisor before making any investment decision.