Why Are Global Markets Freaking Out Over US Bonds

When interest rates on 10-year bonds rise or fall, they can have a ripple effect on everything from mortgage rates to stock prices.

US Bonds

The US bond market just broke a 38 year streak

Rates on US government borrowing costs continue to print their longest run of increases since 1984, as the likelihood of more rate hikes by the Federal Reserve at its Nov. 1-2 meeting keep causing more volatility in global markets.

Yields on the benchmark 10-year Treasury have been climbing for 12 consecutive weeks as the Fed looks for ways to reduce the impact of persistent inflation.

The new print occurred even though there was a small rate decline late in Thursday’s session, as bond yields fell on a hint that the Fed may soon be pumpin’ the brakes.

Elsewhere, traders were caught off guard by the sudden rise of the Japanese yen — the third most traded currency in the world, only after the US Dollar and Euro- made a 32-year high last Friday at 151.95 — and political instability in the UK. While this week’s European Central Bank interest rate decision is important, it’s been overshadowed by movements in US bonds and the prospects for US rates.

Ten-year bonds are crucial as they establish a standard against which the risk of other investments can be measured. Trillions of dollars hinge on this measurement. In other words, they provide a sort of “anchor” for the entire global financial system. Consequently, when interest rates on 10-year bonds rise or fall, they can have a ripple effect on everything from mortgage rates to stock prices.

Given the pivotal role that ten-year bonds play in the global economy, it’s no wonder that they are closely watched by investors around the world.

The yield rate on Treasuries hit 4.3370% on Oct. 20, the highest it’s been since March 2007. This is a 64% spike from the 2.6430% in late July.

The outlook changed when the Wall Street Journal reported that even though it looks like the Fed will still raise rates by three-quarters of a percentage point in November, things might start to slow down soon. According to the report, the central bank might shift to smaller interest-rate rises in December.

The equities market surged due to the expectation of low interest rates. In fact, all three major averages, the Dow Jones, S&P 500 and Nasdaq printed their best week since June at Friday’s close. The greenback retreated as well, after being bolstered by the Fed’s aggressive rate hike policy.

Ahead of the next Federal Reserve meeting in early November, increasing concerns that the U.S. economy may enter a recession due to rising interest rates are mounting. Last week, Bloomberg economists announced that they had revised their economic outlook and now believe there is a 100% chance of recession in the next 12 months.

“That tipping point is coming, likely in the form of a first pivot towards a slower pace of policy rate increases,” New York Life Investments’ Lauren Goodwin said in a note last week. “At this juncture, the likelihood that October and November inflation figures show meaningful downturn is low, potentially pushing that policy rate deceleration into 2023.”

At last check, US10Y yield printed 4.1730%.

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