Yesterday, October 3, the yield on the 30-year U.S. Treasury hit 5% for the first time since 2007. The yield on the German 10-year bond hit 3% for the first time since 2011.
In one financial market after another higher U.S. yields are driving global bond prices lower and bond yields higher.
“U.S. yields at highs for the year are starting to look disruptive for other regions and sectors in global fixed income,” HSBC Holdings strategist Steven Major wrote in a note to clients.
The volatility has spread to corporate bonds with at least two borrowers standing down from issuing Tuesday as blue-chip yields reached a 2023 high of 6.15%. The largest speculative-grade bond ETF was hit by the biggest two-day slump this year.
“These moves are starting to cause worries across all asset classes,” James Wilson, a money manager at Jamieson Coote Bonds in Melbourne, told Bloomberg. “There’s a buyer’s strike at the moment and no one wants to step in front of rising yields, despite getting to quite oversold levels.”
Global bonds are now down 3.5% in 2023, while ICE’s BofA MOVE Index for Treasuries volatility jumped to the highest since May on Tuesday. The average price for bonds in the Bloomberg US Treasury Index has tumbled to 85.5 cents on the dollar, half a cent above the record low in 1981.
A major reason behind the buyers strike–and consequently lower prices and higher yields–is that equivalent yields are available in safer alternatives such as bank CDs and money market offerings. Investors can find 5-year CDs, which won’t lose money if interest rates rise, paying up to 5.60% as of October 4, according to Bankrate.com.
Until bond markets seem to be safer, there’s no reason to prefer a 5-year Treasury paying 4.72% to a 5% CD.
This calculation changes, however, as soon as markets become convinced that the Federal Reserve and other central banks are about to lower interest rates. Then a bond holder has a chance at q capital gain from rising bond prices. A CD owner wouldn’t see any capital gain.
Until then, however, the global plunge in bonds is likely to go on. And higher bond yields,in case you don’t remember, aren’t good for stock prices.
