On Monday, the benchmark 10-year Treasury yield surged above 5%, marking its highest level since 2007, driven by expectations of continued high interest rates due to the robust U.S. economy.
The combination of higher yields and concerns about an escalating conflict in the Middle East weighed on market sentiment. Global shares slumped to seven-month lows as a result.
The 10-year Treasury yield reached 5.012%, rising 8.6 basis points during the day, highlighting the extent of the ongoing global bond sell-off. Rising government debt has increased the supply of bonds worldwide.
Economist Chris Scicluna, Chief Economist at Daiwa Capital, noted that “5% from an economic perspective is just another number. But as far as investors are concerned, it resonates.”
The recent surge in bond yields has tightened monetary conditions without requiring central banks to take action. This has allowed the Federal Reserve to signal that it will likely keep interest rates steady at its upcoming policy meeting.
Market futures suggest about a 70% chance that the Fed has concluded its tightening cycle, and there is increasing speculation about rate cuts starting in May next year.
Higher bond yields have posed challenges to equity valuations, resulting in declines in major indices. The VIX “fear index” of U.S. stock market volatility reached its highest level since March.
The MSCI All-World index dropped 0.2%, reaching its lowest level since late March. In Europe, the STOXX 600 fell 0.5%, also at seven-month lows, and rate-sensitive real estate stocks reached their lowest point since 2012.
Concerns about the Middle East conflict were another focal point for investors, as Israel launched an offensive against Gaza, and tensions on the Lebanon border escalated.
Growth in the U.S. economy, driven by strong consumer demand, is expected to support corporate profits. This week, figures on U.S. GDP are projected to reveal annualized growth of around 4.2% in the third quarter, with nominal annualized growth potentially as high as 7%.
The U.S. dollar has benefited from this strong economic performance, although the threat of Japanese intervention has limited the USD/JPY exchange rate to around 150.00 yen. The dollar last traded at 149.93 yen, just below the recent peak of 150.16.
Yields in Japan also increased on speculation that the Bank of Japan might announce a further adjustment to its yield curve control policy at its policy meeting on October 31.
The euro rose 0.17% to $1.0613, while the Swiss franc, which has benefited from safe-haven inflows in recent weeks, held steady at 0.8928 per dollar.
As the European Central Bank (ECB) meets later this week, investors will be closely watching for any signals from ECB President Christine Lagarde regarding the impact of the recent rise in global bond yields on the euro zone’s monetary policy outlook.
Gold, which reached its highest level since May last week, remained flat at $1,980 an ounce.
Oil prices recovered after earlier losses, with continued focus on developments in the Middle East. Brent crude remained flat at $92.21 a barrel, while U.S. crude stood at $87.97.
Please note that the article presents a hypothetical scenario as of its publication date, and the actual financial and economic situation may have evolved since then.