Red October Sees US Treasury yield Spike: Amidst a tumultuous period in world markets referred to as “Red October,” the situation remained unsettling on Friday. The trigger was the U.S. government bond yields reaching 5% for the first time since 2007. This escalation in yields, coupled with an increasingly threatening conflict in the Middle East, left investors in search of safe havens.
Traditionally, the key driver of global borrowing costs, the 10-year U.S. Treasury yield, had receded to 4.93%. However, with oil prices exceeding $93 a barrel and the possibility of Israel launching a full-scale invasion of Gaza looming, anxiety was palpable.
This unease led to a 1% drop in Europe’s share markets, and Asian stocks had already fallen to an 11-month low overnight. Futures markets indicated another decline on Wall Street, which had lost 2% in the preceding two days.
The Bank of Japan also stepped in to address the situation, as the 10-year JGB yield reached a decade high. The pursuit of safety pushed gold to a three-month peak, while the U.S. dollar and Swiss franc remained strong. This situation raised concerns among market analysts, such as Alvin Tan from RBC Capital, who found the persistence of high bond yields troubling despite recent market volatility.
Further dampening the mood was a drop in Tesla shares after Elon Musk expressed concerns about demand. In Europe, shares were on track for a 3% weekly loss, and borrowing costs were set for their steepest weekly increase since July. The European Central Bank’s upcoming meeting, expected to maintain interest rates after ten consecutive increases, was overshadowed by more immediate concerns.
Federal Reserve chief Jerome Powell acknowledged that the recent surge in bond yields might marginally reduce the need for further rate hikes but emphasized the strength of the economy.
Also Read: US Treasury Bond Yields Surge: Impact on Equities and Cryptocurrencies
As global borrowing costs rose and Middle East tensions escalated, emerging market stocks reached an 11-month low. Tokyo’s Nikkei was down 0.5% for the day and 3.2% for the week. Data from Japan revealed that core inflation in September dropped below the 3% threshold for the first time in over a year.
China’s blue chips and Hong Kong’s Hang Seng both dropped 0.7%. China opted to keep its benchmark lending rates stable in response to signs of economic stabilization.
The U.S. dollar hovered near the closely monitored 150 yen level at 149.84 yen and was up 0.1% against other major global currencies at 106.34, not far from an 11-month high reached earlier in the month.
Quincy Krosby, chief global strategist at LPL Financial, highlighted the growing focus on the U.S. fiscal deficit due to increased defense funding requirements. President Joe Biden’s call for more funding to support Israel in its conflict with Hamas added to these concerns.
Gold prices surged to a fresh three-month peak at $1,990 per ounce, the highest since late July, as investors sought refuge in these turbulent times. Oil prices were on track for a second consecutive weekly gain, primarily due to concerns of an escalating conflict in the Middle East that could disrupt supplies.
U.S. crude rose by 1% to $90.30 per barrel, and Brent stood at $93.50, marking a 1.2% increase for the day. Investors were wary of carrying risk into the weekend amid heightened geopolitical tensions.
Our Reader’s Queries
Why did Treasury yields increase today?
On Thursday, U.S. Treasury yields saw an increase as investors assessed the future of the economy and financial markets with the new year approaching. It’s important to note that yields and prices have an inverse relationship, and a single basis point represents 0.01%.
What does a spike in the 10 year Treasury yield mean?
The stock market can be affected by the 10-year Treasury yield, as changes in yield can cause fluctuations. An increase in yield may indicate that investors are seeking higher returns, but it can also cause concern among investors who worry that the higher rates could divert funds from the stock market.
Do bond prices fall when Treasury yields rise?
The increase in bond yields has caused a decline in the prices of existing bonds, which has been a major setback for bondholders in 2022. The Bloomberg U.S. Aggregate Bond Index has recorded a total return of -13.0% due to this phenomenon. However, the good news is that bondholders can now earn higher income in 2023, thanks to the elevated bond yields.
Should I sell bonds when interest rates rise?
If you’re not committed to holding onto your bonds until they mature, it’s wise to consider selling them before the interest rates increase. This will allow you to take advantage of more profitable options that are becoming available. Don’t hesitate to make the move when you see the signs of an impending interest rate hike. It’s a clear signal to sell and make the most of your investments.