The recent bond market selloff, along with the accompanying rise in yields, has significant implications for global financial markets – including stocks, corporate bonds, and even mortgage rates – and makes it a critical development for investors and policymakers to monitor closely.
A sustained sell-off in global government bonds on Wednesday briefly pushed US 30-year Treasury yields to 5%, a level not seen since 2007. German 10-year yields also surged to 3%, a significant departure from negative yields in early 2022 and a concerning milestone. This market turbulence could potentially accelerate a global economic slowdown and negatively impact stocks and corporate bonds.
Several factors contributed to Wednesday’s bond market upheaval. Resilient US economic data, a sudden unwinding of traders’ positions as they bet on a bond rally, and an increase in bond supply all played a role. The growing consensus that major economies will maintain higher interest rates to combat inflation added to the uncertainty.
In the US Treasury market, 10-year yields increased by up to 20 basis points in just one week, reaching 4.8%, nearly 100 basis points higher this year alone. This abrupt rise in yields led many asset managers, who had previously expected bond prices to rally, to reevaluate their positions. The shift in market sentiment was driven by incorrect positioning, with many investors assuming that the US Federal Reserve’s (Fed’s) rate hikes signalled a favourable time to invest in government bonds.
Additional concerns include the sharp increase in bond supply as governments seek to fund budget deficits and reduce their accumulated bond holdings. This rising borrowing cost is a challenge for central banks, as they must navigate the balance between containing inflation and addressing economic uncertainties.
The uncertainty surrounding when and how economic deterioration might occur complicates matters in bond markets, particularly for longer-dated bonds. The 10-year US term premium, a measure of the compensation investors require for lending money for extended periods, turned positive for the first time since June 2021, reflecting an increase of over 70 basis points since the end of August.
The bond market turmoil had ripple effects across equity markets, driving safe-haven demand for the US dollar and causing world stocks to reach their lowest levels since April. The cost of insuring exposure to European corporate junk bonds also reached a five-month high.
Investors are now navigating a complex landscape, balancing concerns about central bank rate hikes and potential recessions with uncertainties in political governance, such as recent developments in the US House of Representatives.
One key takeaway is that rising government bond yields impact various aspects of the economy, from mortgage rates for homeowners to loan rates for companies. As governments grapple with higher borrowing costs, it affects their ability to finance public services and investments.
A LOOK AT THE DATA
The US’s ISM Manufacturing PMI (Purchasing Managers Index) improved to 49, indicating a slower contraction in manufacturing activity, despite higher Fed borrowing costs. New orders declined less steeply, and production rebounded strongly, reaching its best level since July 2022. Falling input prices for the fifth consecutive month raised hopes of better margins.
Looking at the US labour market, despite an unexpected increase in August job openings to 9.61 million suggesting resilience in the labour market, the latest ADP report showed that US private employers added only 89,000 jobs in September, the lowest figure since January 2021 and well below market expectations. This indicated a slowdown in private sector employment in the US labour market. This number was somewhat contradicted , however, by the US jobless claims figure, which rose by 2,000 to 207,000 in the week ending 30 September, just below estimates. Continuing claims fell by 1,000 to 1,664,000 in the week ending 23 September, also below estimates. These figures point to a stable job market, further supporting the notion of a tight labour market that can sustain higher interest rates.
In the United Kingdom (UK), the manufacturing sector remained weak, with a PMI of 44.3. This indicated ongoing market uncertainty and declining output. While input costs decreased, selling prices rose marginally. The composite PMI for the UK stood at 48.5, signaling a faster reduction in private sector output. These indicators paint a challenging economic picture for the UK.
The eurozone saw contrasting developments. Unemployment reached a record low of 6.4% in August, providing some positive news. However, the composite PMI indicated a moderate contraction in business activity across the eurozone’s private sector. Both manufacturing and services output declined, and new orders fell at their sharpest rate since November 2020. Additionally, outstanding business volumes contracted at their fastest rate since June 2020. On the positive side, employment levels rose marginally, albeit weaker than the average in the first half of 2023. Regarding prices, input cost inflation accelerated to a four-month high, while prices charged increased at their lowest rate since February 2021. Business confidence also weakened significantly.
STOCKS MIXED AS BOND YIELDS WEIGH
US stocks showed mixed performance on Thursday, with caution prevailing ahead of today’s anticipated US non-farm payrolls report. Tech giants like Apple, Microsoft, Amazon, and Alphabet were flat on the day, while Nvidia gained around 1.5%. Beverage manufacturer Coca-Cola’s shares hit a 1-year low of $52.38.
In the UK, the FTSE 100 edged up 0.5%, ending a three-day decline. Real estate and consumer cyclicals performed well, while the energy sector struggled. Food retailer Tesco gained 3.6%, tobacco company Imperial Brands gained 3.9%, and fast-moving goods manufacturer Reckitt Benckiser was up 1.0%. In contrast, global mining and commodities giant Glencore lost 0.8%. UK retail and commercial bank Metro Bank saw its shares decline by 26%.
In European markets, concerns over bond yields persisted. Germany’s Dax index dipped 0.3% to 15,050, while the pan-European STOXX 600 hovered near its lowest levels since March, at 440. Energy giants, including TotalEnergies, Eni, and Shell, faced declines, and train and transport leader Alstom’s shares plummeted 37.5%, leading to a trading suspension. Shares in the world’s largest jewellery brand, Pandora, enjoyed rather better fortunes, rising 12% after the company raised its growth targets.
In Japan, the Nikkei 225 climbed 1.8%, while the broader TOPIX Index rallied 2.02%, ending a five-day decline. These gains followed Wall Street’s positive lead, with softer-than-expected US jobs data easing bond yields.
KEEPING UP WITH COMMODITIES
WTI crude futures experienced a 2% decline, settling around $84/barrel, marking a five-week low after a 5.6% drop the previous day. Concerns over lower demand despite tight supplies, fueled by worries about prolonged high-interest rates, weighed on the oil market. Recent data from the Energy Information Agency revealed a significant increase in US gasoline stocks, the largest since early 2022, and the four-week average for gasoline demand reached its lowest point for this time of year since 1998. The expanded Organization of the Petroleum Exporting Countries, OPEC+, maintained its oil output policy, including extending voluntary supply cuts by Saudi Arabia and Russia until year-end. Russia indicated that there is no fixed deadline for lifting the fuel export ban introduced in September.
Gold prices rebounded above $1,820/ounce, recovering from seven-month lows. This came as the US dollar and Treasury yields retreated on Thursday. Gold also faced selling pressure the previous week following hawkish signals from the US Fed.
Copper futures declined, falling below $3.60/£ to over four-month lows. Comments from Fed officials indicating a prolonged high-interest rate environment weighed on the demand outlook for industrial inputs. Positive US PMI data and signs of a tight labour market raised doubts about industrial activity. China’s uncertain economic situation also contributed to demand worries, with concerns about financial contagion from highly indebted property developers. Supply concerns, however, limited the decline. Reports projected that copper demand would double by 2035, missing the International Copper Association’s forecast of a 26% supply increase. Chile’s Codelco’s output fell by 14% in the first half of the year, extending a 7% decline from 2022, contributing to supply concerns.
DOLLAR REMAINS RESILIENT
The US Dollar Index remained relatively stable at around 106.7 on Thursday, showing minimal change from its earlier levels and staying close to the highs last seen in November. This stability came as initial jobless claims once again fell below expectations, indicating a robust US job market. The dollar weakened slightly against the euro and yen but showed strength against the Australian and New Zealand dollars.
Meanwhile, the euro continued to trade below the $1.05/€ mark, remaining near its lowest level since November 2022. This was influenced by statements from various European Central Bank (ECB) officials and US labour market data. ECB Governing Council member, Mario Centeno, suggested that the ECB’s cycle of interest rate hikes might have concluded, citing decreasing inflation in the eurozone. Cyprus Central Bank Governor, Constantinos Herodotou, praised the effectiveness of ECB monetary policy in controlling prices. ECB Vice-President, Luis de Guindos, noted that a substantial portion of the policy tightening has yet to impact the economy.
The pound stabilised around the $1.21/£ mark, ending a streak of declines but remaining close to its weakest level since mid-March. This followed a survey that indicated UK business activity was less subdued than initially feared in September. Additionally, economic data concerning the US labour market presented a mixed picture. Investors also considered signs of moderating inflation in the UK, which could influence the Bank of England’s interest rate policies.
The pound started the day trading at 1.2194/$ and 1.1565/€.
Sources: Bloomberg, Refinitiv, Trading Economics, Investing.com and WSJ.
Written by Citadel Global Director, Bianca Botes
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