Weak demand at the auction of US Treasury bonds and increasing concerns about the Fed tightening interest rates have pushed yields to new annual highs.
Stock market prices on screens: On Wednesday, US government bond yields rose significantly. Photo: IMAGO/UPI Photo
New York. In the world's largest and most important bond market, investors threw scores of US government bonds onto the market on Wednesday. As a result, US debt yields have risen to their highest levels in years. European government bonds also came under pressure as a result.
The important ten-year US benchmark bond climbed to 5.13 percent in the middle of the week, its highest level since the 2007 financial crisis. The yield on ten-year bonds is now heading for its seventh consecutive month of increase - the longest upward movement since 2011.
Across the other maturities, US yields also rose to multi-year highs during trading.
Two-year US bonds rose by 12 basis points to 4.889 percent.
The five-year US government bond was now trading at just over 5.0 percent.
The yield on the ten-year US government bond, which is considered the benchmark for corporate bonds, climbed by up to 18 basis points to 5.13 percent, the highest level in 19 years.
The 30-year US Treasury bond rose to 5.4 percent - only about four basis points below its high since 2004.
Reasons for the sell-off
On Wednesday, a series of data and developments put pressure on bond markets. On the one hand, the Purchasing Managers' Index for the manufacturing and services sectors from S&P Global was presented today. Accordingly, economic activity in September reached its highest level in over five years.
However, data provider S&P noted that this growth was accompanied by serious bottlenecks in supply chains. This suggests that “companies are gaining pricing power, which is a concern for the inflation outlook,” said S&P economist Chris Williamson.
The board member of the US Federal Reserve (Fed), Michael Barr, continued to fuel concerns about the Fed's significantly tighter monetary policy. At a regional central bank event in Chicago on Wednesday, he said further interest rate hikes would likely be necessary to bring inflation back to the central bank's target. US inflation has exceeded the central bank's target of two percent for over five years.
Last week, the monetary authorities led by Fed Chairman Kevin Warsh raised key interest rates to a range of 3.75 to 4.00 percent for the first time in over three years. Warsh had struck a much more “hawkish” tone. There is now speculation in the market about a possible interest rate tightening cycle.
Concerns about a significantly tighter policy from the US Federal Reserve led to price losses on the bond markets. If the prices for bonds fall, their returns rise in reverse.
The economic data was also published against the backdrop of rising oil prices as a result of the Iran conflict, where there is still no sign of a permanent solution. The price for a barrel (159 liters) of Brent crude oil was also over $100 in the middle of the week.
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Weak demand at auction
Investors are also likely to have followed the auction results for five-year US government bonds on Wednesday particularly closely.
The early losses in bonds were compounded by the afternoon auction of $70 billion in five-year bonds, which produced the highest auction yield since 2006. This indicates weaker demand – meaning investors are demanding a higher return.
The required return of 5.033 percent to complete the auction was more than three basis points above the level expected before the bidding deadline.
By that measure, it was the second-worst five-year bond auction since records began in 2018, with only the June 2022 result following the Fed's first of several significant 75 basis point rate hikes worse.
On Tuesday, the U.S. Treasury auctioned $69 billion in two-year bonds. Here too, investors demanded the highest return in more than two years at 4.787 percent.
The second transaction under this expansion, targeting bonds with a maturity of 20 to 30 years, is scheduled for Thursday.
Higher interest rates make it more expensive to take on debt
The sell-off in bonds has been driving up the yields on numerous government bonds for weeks. Renewed pressures in the bond market are adding pressure to the Treasury Department's expanded buyback program under Scott Bessent, announced in mid-August. Experts saw this as an attempt by the Treasury to push down yields on the long end.
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The return does not only represent the interest rate at which companies and property buyers take out loans. It also represents the interest rate at which the US government borrows money on the market. As Treasury yields rise, it becomes increasingly expensive for the US government to pay off its growing debt burden. Annual U.S. interest payments could hit $1 trillion this year.
But instead of shrinking, the budget hole is getting bigger every year. This can also be seen in the gigantic deficit in the USA. This year, that could rise to $2.1 trillion, according to the Congressional Budget Office (CBO).
With agency material.
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