Bond Yields Surge to Multi-Decade Highs Amid Energy Crisis
The US bond market has experienced another difficult week, with the 10-year Treasury yield reaching around 5.2% and the 30-year yield touching 5.5%. These levels have not been seen since 2007 and 2004, respectively.
Yields have also risen across major developed markets due to higher energy prices and stronger economic data, making investors less likely to expect monetary easing.
The latest move has had a negative impact on equities, with US stocks falling for three straight sessions through Thursday. Technology stocks have been particularly affected by the increase in bond yields, as it raises the discount rate applied to future earnings and weighs heavily on long-duration growth stocks.
According to Rabobank's September 24 note, sharp increases in yields have occurred across global bond markets, including the US, Canada, the UK, Australia, Germany, France, and Japan. The US 10-year yield has risen to 5.11% from 4.93% over the past day.
Rabobank points out that stronger economic data has made it harder for yields to reverse. Eurozone services activity came in slightly above expectations, while US manufacturing and services PMIs jumped to 57.0 and 58.7, respectively. This resilient growth reduces pressure on central banks to cut rates.
However, this also means that inflation risks remain a concern. Brent crude has moved back above $100 a barrel due to the ongoing Middle East conflict, which is disrupting the energy outlook.
As JPMAM notes, the bond market is being forced to price a more difficult combination: higher energy costs, persistent inflation risks, stronger-than-expected growth, and the possibility of further rate hikes.