After rising to a record high of over 5 percent for the first 16 years, the yield on the 10-year US Treasury fell back Monday. This continued the recent dramatic swings in the global bond market.
The benchmark yield for asset prices around the world, the 10-year yield, rose to its highest level in July 2007 at 5,02 percent early on Monday. The rise in yields capped off a slump in bond prices that lasted for several weeks as investors betted on the US Federal Reserve to keep rates high.
Later, yields fell from their peak and accelerated after Bill Ackman, a billionaire investor who had been betting against long-term Treasuries, announced that he would no longer be making the bearish wager. Early in the afternoon, they traded at 4.85 percent in New York.
Ackman wrote on X (formerly Twitter) that there was too much risk to continue shorting bonds at the current long-term interest rates. He also said the growth rate in the US is lower than mainstream data would suggest. In August, the hedge fund manager disclosed his first short position in 30-year Treasuries. This added to the pressure that bond markets were under. The 30-year US bond yield dropped to 5,01 per cent after reaching a previous high of 5.18 percent.
Investors have traditionally sought refuge in government bonds during times of market volatility or economic weakness. They have not benefited much from the Israel-Hamas crisis, which temporarily triggered a flight towards Treasuries in this month, but investors quickly shrugged it off, focusing on domestic factors that are driving up government borrowing costs.
Since the Fed’s September meeting, when it released the “dot plot”, indicated that they were anticipating a slower pace of interest rate reductions in 2024 and in 2025. Since then, robust US economic data has heightened expectations that the central banks will likely keep interest rates high for longer. Investors are also worried about the US government’s massive borrowing plans.
In recent weeks, stronger than expected US retail and labour market data, as well as inflation figures, have helped to push yields up, despite historic interest rate increases delivered by the Fed in the last 18 months.
Mohit Kumar is the chief European economist for Jefferies. He says that the risk of an escalation within Middle East will usually increase Treasuries. “But with the US economy doing well, and a wall of [Treasury] issuing coming up, everyone is concerned about who will buy,” said Kumar.
On the futures markets, traders bet that interest rates will reach 4.7 percent by the end 2024. This is compared to expectations at the beginning of September of a rate of 4.2 percent.
The Fed Chair Jay Powell signalled on Thursday that the US central banks is prepared to refrain from raising interest rates at its next meeting in November.
Analysts said that the Fed’s unwillingness to increase borrowing costs further despite an economy in good health may force policymakers hold them at high levels to reduce inflation.
The rising pressure on yields has also been exacerbated by the growing concerns about the US government’s budget deficit of nearly $2 trillion annually. This was exacerbated in August when Fitch Ratings lowered the US credit rating.
Treasuries led the way in bond yields throughout Europe. The yield on the benchmark German Bund, which is used for the eurozone’s bonds, increased by 0.08 percentage points, before dropping to 2.88 percent. The yields on UK 10-year gilts also rose, but then fell by 0.03 percentage points to settle at 2.88 per cent.
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