Global Government Bond Yields Hit Decades-Highs... Driven by Soaring Oil Prices and Fiscal Instability

U.S. 10-Year Yield Surpasses 5.34% During Session
U.S. Mortgage Rates Rise to 7.28%
U.K. 30-Year Yield Exceeds 6%
Safe-Haven Buying Pushes Yields Down
Fed Vice Chair’s Comments Aid Bond Rebound

Driven by a global sell-off in government bonds, long-term interest rates in the United States and major European countries have surged to their highest levels in decades. Concerns over inflation due to rising oil prices and the burden of government debt have prompted investors to sell off government bonds. Although inflows of demand for safe assets and bargain hunting led to a reversal in yields afterward, the rise in borrowing costs continues to impact households.

According to CNBC and others on October 1 (local time), the yield on the 10-year U.S. Treasury bond surpassed 5.34% during the session, marking the highest level since 2002. The 30-year yield also climbed to its highest rate in 24 years. Bond prices and yields move in opposite directions.

The increase in long-term rates is weighing on the U.S. housing market as well. Freddie Mac reported that the 30-year fixed-rate mortgage in the U.S. averaged 7.28% this week, up 0.25 percentage points from last week’s 7.03%. This was the biggest weekly rise since October 2022, and the rate itself is at its highest level since November 2023.

Mortgage rates are heavily influenced by the U.S. 10-year Treasury yield. As Treasury yields rise, the loan burden on homebuyers increases, further hindering a recovery in the housing market.

Long-term interest rates rose in Europe as well. The yield on the UK’s 30-year government bond exceeded 6% during the session, the highest since 1998, and France’s 10-year yield rose to about 4.96%, marking the highest level since 2002.

High Oil Prices and Fiscal Uncertainty... France’s Risk Premium Widens

The background to the sell-off in government bonds includes inflationary pressure from higher energy prices, a stronger-than-expected economy, and increasing demand for funds. The ongoing war in Iran has sustained high oil prices, while expanding investments in artificial intelligence (AI) and data centers and increasing government borrowing are also putting upward pressure on bond yields.

In Europe, concerns about France’s fiscal situation added to the sense of unease. The Financial Times reported that burdens over fiscal austerity and worries about the government budget deficit have weighed on investor sentiment in the French government bond market. The yield spread between 10-year French and German government bonds has also widened, as investors are demanding a higher risk premium on French government bonds.

However, after hitting their intraday highs, yields reversed and declined. Increased buying not only in U.S. Treasuries but also in European government bond markets helped recover some of the sharp early-session price declines.

Bloomberg analyzed that demand for safe assets rose amid fiscal and political uncertainty in France, helping U.S. Treasuries to recover. The unwinding of previously one-sided investor positions also supported renewed buying of government bonds.

Fed’s Cautious Tone Supports U.S. Treasuries… Stocks Also Recover Losses

Comments from Philip Jefferson, Vice Chair of the Federal Reserve, also supported the rebound in U.S. government bonds. In a speech at the University of Virginia, he said that it may take more time to determine whether additional rate hikes are needed. His remarks align with those of John Williams, President of the Federal Reserve Bank of New York, who recently stated that there is no need to rush into further rate increases following last month’s hike.

On the other hand, Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, said he does not know how high rates will need to go to bring down inflation, leaving open the possibility of further tightening. He emphasized that it is the Fed’s job to ease inflation, especially after five years of supply shocks.

As government bond yields retreated from their highs, the New York stock market also recovered earlier losses. The S&P 500 Index closed up 0.19%, while the Nasdaq and Dow Jones indices rose by 0.04% each. However, the rise in stock prices was limited as oil prices continued to climb, with West Texas Intermediate (WTI) crude ending up 2.7% at USD 92.87 per barrel.

This content was produced with the assistance of AI translation services.