Global bond sell-off deepens, sending borrowing costs higher around the world

By John Towfighi, CNN

New York (CNN) — The US 30-year Treasury yield rose as high as 5.5% Thursday afternoon, its highest level since 2004, extending a recent sell-off that has seen yields climb around the globe.

Bond yields jumped this week, surging to fresh highs for this year. Thursday’s action follows a steep bond sell-off Wednesday after new data from S&P Global showed robust US business activity in September but hot inflation from higher energy prices.

That data prompted traders to raise bet on the Federal Reserve raising interest rates further to tamp down inflation. Traders are pricing in a 71% chance the Fed hikes in October, up from 11% one month ago, according to the CME FedWatch forecasting tool.

The key 10-year Treasury yield rose as high as 5.22% Thursday, a fresh high for this year and the highest level since 2007. The key yield has surged more than 20 basis points this week – a striking move in bond markets.

Bond yields help set interest rates across the economy. As yields climb to multi-year highs, it pushes up the cost of borrowing for consumers, businesses and governments alike.

Oil prices rose Thursday, with the front-month futures contract for Brent crude settling up 3.41% at $106.60 per barrel. That’s adding to inflation pressures and pushing up yields.

Brent rose as high as $108 per barrel earlier but came off its high of the day after Reuters reported that US and Iranian negotiators discussed a path to reopening the Strait of Hormuz. Brent dropped as low as roughly $104 per barrel after the report before rising back to $106.60.

“It’s just a very tricky environment because investors are really trading headlines more so than anything else, just because of the lack of certainty,” Gennadiy Goldberg, head of US rates strategy at TD Securities, told CNN.

The rise in bond yields is a global phenomenon: Ten-year yields in France and Germany rose to their highest levels in roughly 15 years. Japan’s 10-year yield rose to 3.08%, a level not seen since 1996.

“Every major bond market’s feeling the heat at once,” Nigel Green, CEO at deVere Group, said in a note.

Yields rise when bond prices fall. A sell-off is rattling global bond markets, sending yields higher, as traders adjust to the prospect of central banks raising interest rates.

At the start of the year, some Wall Street analysts expected the Fed to have room to cut rates this year. But the energy shock caused by the war with Iran and a resilient economy have shifted the outlook. The two-year yield, which tracks expectations for Fed policy, has climbed from 3.48% at the start of the year to 4.93% this month.

The surge in energy prices caused by the closure of the Strait of Hormuz reignited inflation pressures in economies around the world, leading to a shift in central banks’ outlook toward prioritizing raising rates.

“Anyone positioned for a global easing cycle has had the ground pulled from under them,” Green said.

To be sure, traders’ bets on central bank policy can shift depending on the outlook for oil prices and the conflict in the Middle East. Yields could pullback if traders start to scale back their bets on higher central bank rates.

But for long-term bonds, which also move on factors including economic growth and inflation, some analysts say yields look set to remain elevated at multi-year highs. The rise in yields can also make life more expensive by pushing up the cost of mortgages, auto loans and other business loans.

The Treasury Department on Thursday bought back roughly $4.08 billion in long-term bonds in the second of a series of increased buyback operations first announced in August. The buybacks are meant to improve liquidity in the longer-term Treasury market, but they have done little to help tame the rise in yields. Investors say fundamentals are pointing to long-term yields remaining elevated for longer.

Stocks bounced around as traders digested headlines on the Middle East conflict: The S&P 500 ended the day down just 0.02%, while the Nasdaq Composite rose just 0.01%. Stocks were coming off a day in the red as the rise in bond yields puts pressure on the market.

“None of the drivers that brought us the increase in rates are going away,” Padhraic Garvey, head of global debt and rates strategy at ING, wrote in a note. “Long-end rates remain more exposed to upward pressure.”

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