By Mike Dolan
Oct 1 (Reuters) – A new month, a new quarter – but the bond squeeze goes on, with the 10-year US Treasury yield hitting a 24-year high on Thursday.
Even though Wednesday’s US August inflation updates, with long-expected methodology changes, were softer than forecast, they did little to calm long-dated Treasury yields as the third quarter came to a close.
The US 10-year yield heads into October topping 5.3%, showing that dialed-back expectations of another Fed rate hike this month and better news on inflation have not yet been enough to rein in soaring long-term borrowing costs.
Maybe the quarter-end skewed things somewhat, and we may need to see how this all pans out next week once the September payrolls report is released on Friday.
Either way, by the close of business on Wednesday, the quarterly jump in 10-year yields was the largest since 1994. That was a bond storm that saw rapid Fed rate rises to get ahead of the curve and one which stalled some of the more ambitious fiscal plans of then-President Bill Clinton.
Back in the present, bond tensions saw stocks settle mostly lower again on Wednesday, but another AI-infused earnings beat from chipmaker Micron Technology, whose stock has almost quadrupled this year, lifted the mood in global tech stocks overnight. Micron’s own stock is up about 1% out of hours.
China’s markets are closed today as the week-long National Day holidays start, but there was plenty of activity in Europe on Wednesday.
European bond markets remained under similar pressure to Treasuries, but attention has homed in on France’s widening 10-year risk premium to Germany, which has ballooned above 120 basis points for the first time in 14 years. New debt estimates from the French Treasury late Tuesday, and the budget and political tensions ahead in Paris, are starting to rankle.
In Britain, much of the political attention was on Prime Minister Andy Burnham’s main policy speech to the governing Labour Party this week, notably the eye-catching emphasis on re-engaging with the European Union – considering every option up to and including re-applying to join the bloc after a second referendum.
Back on Wall Street, Thursday will bring the September ISM manufacturing business survey and a long list of Fed speakers. And in the background President Trump once again pushed for former Fed Chair and current board member Jerome Powell to resign over cost overruns in Fed building renovations.
Chart of the day
Japanese bonds saw the biggest weekly exit of foreign investors in six months in the week through September 26, Ministry of Finance data showed, with overseas funds withdrawing 4.6 trillion yen ($29.2 billion) from the country’s debt securities during the week.
The Bank of Japan raised its key policy rate to a 31-year high of 1.25% last month and signaled further rate hikes to counter persistent inflationary pressures driven by elevated crude oil prices. But continued pressure on the yen threatens to brew a storm.
Some BOJ policymakers saw the need to accelerate the pace of interest rate rises or bring them closer to the central bank’s “goal” soon, a readout from the September meeting showed, heightening the chance of more rate hikes.
With more tightening likely on the horizon, the 10-year Japanese government bond yield climbed to 3.12% last week.
Today’s events to watch
• US weekly jobless claims (8:30 a.m. EDT), September ISM Manufacturing PMI (10 a.m. EDT)
• Fed’s Christopher Waller, Philip Jefferson, Michelle Bowman and Lisa Cook, and regional Fed presidents Thomas Barkin, John Williams and Lorie Logan, all speak
Before you head off, check out my latest column on the prospect of a UK re-entry into the European Union and what that could mean for sterling assets.
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