US Treasury Yields hit 24-year highs amid energy-driven inflation concerns
- 10-year and 30-year yields reached 5.33% and 5.67%, respectively, while two-year yields rose to 4.92%.
- Elevated oil prices fueled inflation fears, but cooler PCE data lowered October Fed rate hike expectations to 39%.
- Investor focus shifts to Friday's Nonfarm Payrolls report, with consensus forecasting 90,000 September jobs added.
US Treasury yields climbed to 24-year highs amid growing concerns over persistent, energy-driven inflation that could prompt tighter monetary policy. At the time of writing, the 10-year Treasury yield rose to 5.33%, while the 30-year yield reached 5.67%. Meanwhile, the two-year US yield advanced for the second consecutive session, touching 4.92%. Adding to these inflationary risks, oil prices remained elevated as the United States (US) and Iran made little progress in negotiations, despite emerging signs of recovering Middle East supply flows.
Oil shock drives bond rout as US-Iran tensions flare
Deutsche Bank’s Jim Reid characterises the period as “a tricky quarter,” noting that the re-escalation in the US-Iran conflict has been a key driver of market stress. He points out that Brent crude oil was “up +42.0% from its lows at the end of June,” a move that “led to a major global bond selloff,” with “10yr Treasury yields up for a 7th consecutive month for the first time since 2011.”
However, expectations for near-term Federal Reserve (Fed) rate hikes eased following softer-than-expected inflation metrics. The CME FedWatch Tool indicated that markets now price in approximately a 39% chance of an October rate hike, down from nearly 51% prior to the latest release.
Analysts at MUFG/BTMU note that “short-term US yields and the US Dollar initially fell after the report, but the moves proved to be short-lived,” as markets quickly looked through the surprise in the inflation data. They explain that “the main reason for the softer PCE deflator report was bigger than expected revisions from the Bureau of Economic Analysis after they updated their methodology for three components: portfolio management and advice, software and accessories, and legal services.” While it had been “broadly expected that the revisions would lower the annual rate of change for the core PCE deflator by roughly 10-20bps,” MUFG/BTMU highlight that “the actual revisions lowered it by 36bps,” underscoring a more pronounced moderation in underlying price pressures than consensus had anticipated.
August US Personal Consumption Expenditures (PCE) price index rose 0.3% month-over-month against a 0.4% forecast, while core PCE grew 0.2%, below the 0.3% consensus. On an annual basis, headline PCE inflation decelerated to 3.4%, coming in significantly under the projected 3.7%. Market attention now shifts to Friday’s US Nonfarm Payrolls report, with consensus estimates anticipating 90,000 jobs added in September and the unemployment rate holding steady at 4.1%.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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