The bond market is in a state of unrest. For now, policymakers in Washington are shrugging it off.
Yields on 30-year Treasury bonds — a government bond that underpins long-term borrowing — climbed to 5.10% on Friday. Earlier in the week, they had surged to 5.2%, the highest level since 2007, when the financial crisis started taking root. It’s an identical story for 10-year bonds, which are connected to credit card debt, mortgages, and car loans. The yield on 10-year bonds are near 4.6%, their highest level in a year. These aren’t inconsequential movements: Even these small yield increases can add up to $2 trillion to the federal debt over 10 years.
Now bond traders are surrendering to the fear of inflation that’s here to stay, elevating the stakes for Washington policymakers steering an economy under mounting strain. Consumer confidence is plummeting to new lows as Americans struggle paying more for gas, groceries, and other goods due to the fallout of rising energy prices from the Iran war. Any prolonged climb in yields will amplify the financial pain Americans are experiencing since consumer lending costs increase in tandem.
Bond yields move opposite to prices. So a higher yield results in an investor receiving larger annual interest payments from borrowers deemed riskier. U.S. Treasury bonds, though, remain the backbone of the global financial system, enabled by the pervasive appetite to conduct international transactions in dollars. Japan, China, and the U.K. are the three top holders of Treasuries.
Robin Brooks, an economist and senior fellow at the Brookings Institution, said the lengthy Strait of Hormuz closure was the chief driver behind the recent spike in yields. The war against Iran has virtually shuttered all commercial traffic, including oil, from crossing the waterway for close to three months, causing a supply crunch that has sent energy prices sharply upward.
“If by some miracle we see a peace deal and oil tanker traffic through the Strait normalizes, short- and long-term yields will fall quickly. But if the status quo drags on, long-term yields have more catching up to do,” Brooks wrote in a Substack post last week. Last week’s “long-term yield spike is therefore about markets capitulating on the idea that this conflict gets resolved soon.”
That uncertainty is poised to linger for several more weeks, possibly more. American and Iranian negotiators are at loggerheads over the fate of Iran’s nuclear program, and President Donald Trump hasn’t stopped threatening to tear up the fragile ceasefire and order another wave of airstrikes.
The bond market has acted as a brake on Trump before. In April of last year, the president acknowledged the bond markets had turned “yippy,” and it became part of the reason he backed down from instituting global tariffs — at least for another few months. During this stretch, it hasn’t packed the same firepower that it did last year.
The bond market’s message for the Fed
The U.S. is hardly alone in experiencing higher bond yields. The yield on 30-year Japanese bonds reached 4%, its highest level ever due to investor concerns about inflation and Japan’s enormous pile of government debt.
Earlier this month, the 30-year yield on U.K. bonds climbed to their highest level since 1998. It showcases the U.K’s increasing reliance on “the kindness of strangers” in financing its burgeoning deficit, as one Bank of England central governor put it previously.
At this stage, bond traders are relaying a straightforward message to the Fed: Interest rates aren’t high enough. Two-year Treasury yields are viewed as a reliable forecaster of Fed interest rates, and traders are starting to price in that the Fed will be forced to confront inflation with rate hikes.
Yields on two-year Treasury notes stand at 4.10%, significantly higher than the Fed’s current benchmark 3.50% to 3.75% interest rate.
“The Bond Vigilantes are threatening that if the Fed doesn’t tighten credit conditions, they will do so to maintain law and order in the economy,” market analyst Ed Yardeni wrote in a research note, per CNBC. He projected that Fed policymakers would sit still at their next meeting in June, followed by proceeding with a quarter-point rate hike in July.
The rumbles in the bond market arrive at a difficult for Kevin Warsh, the new chair of the Federal Reserve. If Warsh wanted to project an image of independence, he didn’t get off to the best start.
On Friday, he was sworn in at the White House, a fresh reminder of Trump’s belief he should be allowed to dictate lower interest rates to juice the economy. At the start of the year, most Fed watchers and investors had priced in up to two rate cuts. Those are out the window now.
Joseph Brusuelas, chief economist of the RSM, wrote in a blog post that the current economic environment presents “a conundrum” for Fed officials pushing rate cuts since the AI boom and energy shock from the Iran War is causing inflation to climb precipitously. Fed policymakers are already signaling their next move is more likely to be a rate hike than a cut.
Meanwhile, financial markets have managed to shrug off the latest tumult in bond markets. After a brief slide a week ago, the S&P 500 and the Dow Jones Industrial Average have floated ever higher by clinging onto enthusiasm about the blitz of spending on AI development.
Disclaimer : This story is auto aggregated by a computer programme and has not been created or edited by DOWNTHENEWS. Publisher: finance.yahoo.com
