Global bond markets are experiencing a significant selloff, driving benchmark US Treasury yields towards critical levels. The 10-year Treasury note yield has climbed 18 basis points this week to 4.96%, its highest level since 2023 and approaching its 2007 peak. The 30-year Treasury yield reached 5.36%, a new post-2007 high, while the 10-year yield is nearing 5% and a 19-year high. This movement is attributed to a combination of factors, including escalating oil prices and strong inflation data.
The surge in oil prices, with Brent crude nearing $110 per barrel and West Texas Intermediate topping $104, is a major contributor to inflationary pressures. This increase is linked to the ongoing conflict in Iran and attacks on shipping in the Strait of Hormuz, with Brent crude having soared over 30% in the past week. Traders are now boosting their bets on a Federal Reserve interest rate hike next week, with futures contracts indicating a 60% to 70% probability.
The anticipation of a Fed rate hike is further solidified by recent inflation reports. The producer price index (PPI) accelerated to 5.4% in August, up from 4.8% in July, primarily driven by energy costs. This precedes the crucial consumer price index (CPI) report due Friday, which is expected to influence the Fed's decision. Some Fed officials have indicated that their decision at the September 15-16 meeting will heavily depend on this week's inflation data.
Economists and analysts like Clark Bellin of Bellwether Wealth and Jeffrey Roach of LPL Financial note that inflation remains a significant problem, and a Fed hike appears likely due to entrenched inflation pressures from the Iran war. Krishna Guha at Evercore, while having a "no-Fed-hike call" previously, is reviewing it. Brian Jacobsen of Annex Wealth Management suggests that a Fed hike might be symbolic to assert independence rather than a direct solution to the inflation problem, which he views as a physical and geopolitical issue.
The market's reaction to these developments has been negative, with stocks and bonds dropping. The S&P 500 has fallen for four consecutive days, its longest retreat since June. Asian markets also tumbled, with Tokyo and Seoul down over 2%, and Hong Kong, Shanghai, Sydney, and other major indexes experiencing intense selling. The dollar has strengthened against the yen, reflecting increased US rate expectations. The European Central Bank has already raised rates for the second time since the Iran war, signaling global central bank action in response to rising oil prices.
