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Why are bond yields hitting new multi-year highs again?
Neil Wilson
Investor Content Strategist
Note: This is marketing material. This article is not investment advice, capital is at risk.
Bond yields backed up to fresh multi-year highs, with the path of least resistance still to the upside following the Treasury intervention and a whole host of macro uncertainty coming down the track.
UK gilts are under pressure once more with the 10yr backing up to 5.295%, the highest in 19 years, while we are seeing moves across the curve. Bunds are offered too with the 10yr at 3.45% for its highest since 2011. US 10yr Treasury yields at 4.867% mark a fresh 3-year high. We know some of the underlying factors but here's a stab at what's going on right now....
- Renewed escalation in US-Iran conflict sees biggest attack on shipping since start of war + Iran shows no appetite to back down amid Tehran's new "offensive" stance
- Trump comments that war would end "immediately" after the Midterms are far from bullish and indicate in fact that he knows he can't do anything about it - why not sooner? Because he knows he cannot get the genie back in the bottle.
- Oil +6% this week to $102, crack spreads blowing out, no sign of conflict abating and talk of Trump officials suggesting it will last until the end of his term
- For Eurozone and UK yields the blowout in TTF gas futures to levels not seen since 2022 are exerting additional pressure
- Potential for ECB to sound a little more hawkish and leave further hikes on table may be a factor - markets maybe front-running this a touch although I still think Lagarde won't signal appetite to hike further unless the data and outlook alters since second order inflation impacts are benign and hard to justify restrictive policy stance (more on that earlier).
- Treasury buyback of $6bn underwhelmed, and bond markets are still anxious about intervention in general. If Treasury does a much bigger operation does that signal weakness or strength? Bessent has all this 'asymmetric information' then increasing the buybacks say x8, x10 or whatever, would look to Mr Market like there is a reason to sell bonds...or would it be enough to show intent to 'do whatever it takes' a la Draghi. Markets want to know the limits of Treasury's resolve and will sniff out limits of its power
- The $5k stimmy cheque offer from Trump is a factor - while I think not that credible nevertheless underscores absence of any serious attempt to control the fiscal side with economy running hot at Q3 at +4.7% according to Atlanta Fed GDPNow). John has more on this in the podcast.
- US wholesale inflation data out later today adds uncertainty - expected +0.4% and +0.3% core. The monthly increase would be the strongest in three months after holding unchanged in July and gives an annual read of +5.3%, up from +4.7% in July, while core moves to +4.6% from +4.2% in July
- US CPI inflation is the big test though and just a small shift in the reading could alter the picture for the Fed. Leaving aside why Fed officials can be swayed by a 0.1ppt difference for a single month, it nevertheless means there is an unusually high degree of uncertainty and risk associated with this event. Headline inflation is seen at +0.3% MoM, with the annual rate holding steady at +3.4% in August. Core is seen at +0.2% and slowing slightly to +2.4% YoY.
- 30yr Treasury auction tonight adds new supply at long end and is test of sentiment
- Fed uncertainty remains elevated due to the lack of any forward guidance. Some further thoughts here on what the Fed should do.
- Corporate debt issuance - AI capex has been cited a lot so note yesterday's deluge of corporate bond offerings in Europe by six US companies, including a £4.25bn sterling debt offering by Amazon.
- Political noise from UK govt is negative for gilts - PM Burnham comments in PMQs apparently prioritising benefits over defence are negative for gilts in my view since it shows zero willingness to get a grip on welfare reform. We are not hearing much in terms of the supply side except building new council homes but this comes with significant cost and is not a genuine supply side fix.
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