Selloff in U.S., European Government Bonds Deepens

Dow Jones
09/29

The selloff in U.S. Treasurys and European government bonds deepened Monday, pushing 10-year Treasury and German Bund yields to multiyear highs as yet another setback in efforts to resolve the Middle East conflict drove oil prices higher.

Peace negotiators are pressing Iran to make a concession on its nuclear program to revive ceasefire talks with the U.S. after President Trump rejected Iran's truce proposal.

The two-year U.S. Treasury yield reached 4.922%, its highest intraday level since May 2024. The 10-year U.S. Treasury yield rose to 5.241%, the highest since June 2007, while the 30-year Treasury yield touched 5.561%, a level last reached in 2002.

Money markets currently price in a 70% probability of a 25-basis-point rate raise by the Federal Reserve in October. The Fed governor Lisa Cook said Monday that she expects to see continuing pressure on inflation from the build out of artificial intelligence in the coming months. Tuesday brings a slate of Fed speakers who may weigh in on their decision to raise interest rates at the September meeting.

The new highs follow President Donald Trump's rejection of a ceasefire deal with Iran, while neighboring countries pressure Tehran to be more flexible regarding their nuclear plans. Oil prices rose 3%.

Volatile geopolitics "is causing oil prices to increase [and] it's making people nervous," said Allyson Heumann, a bond markets expert at Tulane University's Freeman School of Business. " And when people are nervous, they want more interest for their money."

Rising interest rates around the world, worries about government spending and increasing demand for corporate financing also push yields higher, making bond markets more unpredictable.

"The less said about the bond market, the better," Ajay Rajadhyaksha, global chairman of research at Barclays, said during a webinar.

In the eurozone, government bond supply will be significant, including from the eurozone's four largest issuers-France, Germany, Italy and Spain-, which could hinder any potential rally.

"We are in a one-factor world right now with oil prices impacting rates and rates being the main driver of all asset classes," said Mohit Kumar, global economist at Jefferies, in a note.

The 10-year German Bund yield increased to 3.649%, the highest since mid-2009, according to Tradeweb. Yields on 10-year U.K. government bonds rose 2.1 basis points to 5.446%, the highest intraday level since July 2007, according to Tullett Prebon.

The average yield on a global bond gauge has now climbed above 4% for the first time since 2007, underlining the scale of the global rates reset, said Patrick Munnelly, market strategist at Tickmill Group. "This is no longer just a U.S. story," he said.

"Higher oil, sticky inflation expectations, resilient activity and heavy sovereign financing needs are combining to push global discount rates higher," he said.

"Weak economic data no longer necessarily means lower interest rates," Alain Krief, global chief investment officer at Edmond de Rothschild Asset Management, said in a note. "Favorable economic data is no longer necessarily good news for risky assets if it further delays monetary easing. It is this asymmetry that we must now consider in our investment decisions."

High yields are leaving investors cautious, although there could be scope for some retracement.

"In our view the Treasury market is going through a light buyer's strike," Citi strategist Jason Williams said in a note. Strong economic indicators and hawkish Fed speeches are "likely keeping buyers at bay," he said.

J.P. Morgan strategists stick to their bearish view on U.S. Treasury duration given the upcoming U.S. labor-market report on Friday and technical factors. However, they said their bearish bias wasn't as strong as it has been in recent weeks.

-Jessica Coacci contributed to this article

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