An article on CNN advises that “Yellow lights are flashing in the most important market on the planet: The US bond market”.
The yield on the benchmark 10-year Treasury, climbed on Wednesday 2nd September to the highest level in nearly three years as the Middle East conflict escalated, reinforcing inflation fears.
In Germany, the 10-year yield recently hit levels unseen since 2011. The UK’s 30-year yield hit its highest since 1998. In Japan, which is suddenly dealing with a burst of inflation after decades of no inflation, the 10-year government bond crossed a 3% yield for the first time since 1996.
Yields rise when bond prices fall. A global bond sell off has pushed yields higher, as investors assess the outlook for inflation and consequently central bank interest rates:
- The US war with Iran is heating up again, driving up US defence spending and the cost of oil, gasoline, diesel and jet fuel.
- Investors worry that a sustained increase in the price of oil could push overall inflation higher, making it harder for central banks to ease monetary policy. Higher bond yields underscore investors’ anticipation of a higher interest rate trajectory from central banks.
- The conflict with Iran is costing the United States billions of dollars in additional defence spending, forcing yet more borrowing, putting upward pressure on bond yields.
- Europe, Japan, and South Korea have also ramped up their defence spending due to various global threats.
- The longer the war lasts, the more it will push up already-elevated inflation and bond yields.
- Higher bond yields typically slow the economy by raising the cost of capital.
- Higher bond yields are also stealing thunder from stocks by providing higher yields from what is traditionally thought of as a risk-free alternative.
- Washington itself is hurt by higher interest on the national debt, which last month hit $40 trillion for the first time ever.
- Tech companies are spending trillions of dollars to build out the expensive AI boom, as they put up data centres all over the world – and much of that is being financed through the bond market, crowding out Washington’s own borrowing needs.
- Last month Treasury Secretary Scott Bessent surprised the market with a controversial intervention. It proved only a temporary reprieve and the bond sell-off quickly resumed, with rates surpassing pre-intervention levels.
- The rise in bond yields could unsettle stock markets.
Whether it is KiwiSaver, or an investment portfolio, being in an appropriate fund for your timeframe, with the support of a financial adviser, can help with emotional reactions of a difficult market. An appropriate portfolio should be broadly diversified with a timeframe to allow markets to recover sufficiently within the investment timeframe, in the event of a downturn.