Financial Markets Economist John Lonski examines whether the U.S. economy is reaccelerating under the current administration. Lonski provides analysis on rising bond yields and shifting consumer sentiment.
Yields on U.S. Treasuries held near multi-year highs on Wednesday, as the global bond market experienced a significant selloff driven by concerns that rising energy prices would keep inflation elevated, compounded by mounting government debt burdens.
The benchmark 10-year Treasury note was yielding around 4.8% during early afternoon trading, slightly below the intraday peak of 4.818%—the highest level recorded since November 2023.
Sovereign debt yields climbed across other major developed economies. Japan’s 10-year yield pushed above 3% for the first time in three decades, German 10-year Bund yields reached their highest level since 2011, and Britain’s equivalent yield hit levels not seen since 2008. Bond yields and prices move in opposite directions, so rising yields indicate falling prices.
Bond yields have faced sustained pressure since the onset of the Iran conflict earlier this year, as disruptions to oil supplies pushed gasoline prices higher, creating inflationary headwinds for consumers. Concerns about expanding government debt have further fueled the upward trajectory in yields.
WARSH SAYS FED’S MAIN FOCUS SHOULD BE ON PRICES WITH CENTRAL BANK’S RATE POLICY IN FOCUS
Government bond yields have been near multi-year highs amid a selloff caused by uncertainty over inflation and sovereign debt. (Michael Nagle/Bloomberg via Getty Images)
Angelo Kourkafas, senior global strategist for investment strategy at Edward Jones, noted that “rising government bond yields have been the primary challenge for markets amid solid economic growth and strong corporate earnings, as higher rates continue to put pressure on equity valuations.”
“We believe several factors have contributed to the rise in yields, including uncertainty surrounding the Fed’s policy path and increased bond issuance from both public and private borrowers,” Kourkafas added. “More recently, however, investor concerns have shifted toward the potential inflationary impact of higher energy prices.”
Government bond yields are also facing pressure from increased corporate debt issuance, as technology giants and firms across various sectors turn to debt markets to finance the buildout of artificial intelligence infrastructure, including data centers.
Naka Matsuzawa, chief macro strategist at Nomura Securities, explained that the willingness of AI hyperscalers to pay reasonably high rates was pulling yields broadly higher, with attention now turning to whether economic growth can rise in tandem to help economies absorb elevated borrowing costs.
WHAT WARSH’S JACKSON HOLE SPEECH SIGNALS ABOUT WHERE INTEREST RATES ARE HEADED
Federal Reserve Chair Kevin Warsh said the central bank is focused on bringing down inflation during his Jackson Hole address. (Li Yuanqing/Xinhua via Getty Images)
Michael Metcalfe, head of macro strategy at State Street, said rising energy prices are prompting traders to bet on potential interest rate hikes by the Federal Reserve aimed at curbing inflation.
Metcalfe added that the “narrative is also getting wrapped up with longer-term concerns about the fiscal path,” characterizing the bond market selloff as “orderly.”
The Federal Reserve is scheduled to hold its next monetary policy meeting in two weeks on September 15-16. Markets are pricing in a 64.2% probability that policymakers will raise the benchmark federal funds rate by 25 basis points from its current target range of 3.5% to 3.75%, according to the CME FedWatch tool.
Those odds shifted dramatically over the past week, when the tool had indicated a 63.4% probability of rates remaining at their current level following this month’s Fed meeting.
FED’S FAVORED INFLATION GAUGE ROSE MORE THAN EXPECTED IN JULY
In his keynote address at the annual Jackson Hole Symposium, Fed Chair Kevin Warsh emphasized that the central bank recognizes inflation remains above its 2% target, with the most recent reading of the Fed’s preferred measure—the PCE index—showing prices 3.7% higher than a year ago.
Warsh stated that policymakers’ focus should center on the price stability side of the Fed’s dual mandate, citing “concerning” inflation data and jobs figures reflective of a labor market that is “broadly consistent with full employment.”
Policymakers will receive fresh data on both the labor market and inflation ahead of the meeting later this month, with the August jobs report due out this Friday and last month’s CPI inflation report scheduled for release next Friday.
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Reuters contributed to this report.
