U.S. 30-Year Treasury Yield Hits 19-Year High as Global Bond Yields Surge

[Financial News]  \r\n
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Long-term government bond prices around the world fell sharply on the 15th (local time). Yields, which move inversely to prices, jumped.
Concerns that the Iran War will fuel inflation swept through global bond markets. Stocks also tumbled as Treasury yields spiked.
The Financial Times (FT) reported that long-term government bonds faced heavy selling and equities declined, adding that worries are mounting over a prolonged inflation shock from the Iran War.
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The yield on the 30-year U.S. Treasury note, from a country involved in the war, jumped 0.11 percentage point to close at 5.12%. On a closing basis, that was the highest level since July 2007.
Japan's 30-year government bond yield also surged 0.14 percentage point, breaking above 4% for the first time on record.
The 30-year yield on British government bonds, or gilts, rose 0.2 percentage point to 5.85%, the highest level this century.
The U.S. Department of the Treasury's bond issuance was also hit. The 30-year bond sold this week was awarded at an auction yield of 5% for the first time since 2007. FT said this showed that the selloff in the bond market had spread to Treasuries.
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Financial markets have begun to expect central banks around the world to shift toward rate hikes as inflation surges.
According to the CME Group Inc. FedWatch Tool, the first move by the Federal Reserve System (Fed) under Chair Kevin Warsh is likely to be a rate hike. In the interest-rate futures market, the probability that the Fed will raise rates by 0.25 percentage point in December this year is seen at above 50%. If the move is delayed until January next year, the probability rises to 60%, and by March, the chance of a hike is estimated at above 71%.
Priya Misra, a portfolio manager at JPMorgan Asset Management, said, "A perfect storm hit the bond market over the past week," adding, "Inflation is surging, and government bond yields in Japan and the U.K. have jumped."
Misra warned that "as the economy struggles with the oil shock, higher Treasury yields will inevitably tighten financial conditions as well."
Tom Ross, head of high yield at Janus Henderson Investors, said the "strong repricing" in global government bond yields on the 15th partly reflects the market's growing conviction that inflation risks will ultimately outweigh the political outlook.
Although U.S. President Donald Trump is pressuring the new Fed chair, Kevin Warsh, to cut rates, analysts say Warsh will not be able to yield to that political pressure because of the inflationary impact of the Iran War started by Trump himself.
Other countries are also likely to face stronger political pressure for rate cuts as the war disrupts energy supplies and hurts economic growth. Even so, central banks are expected to eventually raise rates to fight inflation.
Ross said, "Inflation is emerging as a risk that needs to be watched closely."
A survey released that day by BofA showed that fund managers are "increasingly nervous about the rising risk of inflation in the United States." Twenty-five percent of respondents said the Fed is more likely than other major central banks to deliver steeper rate hikes than the market currently expects.
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Rising Treasury yields are also a factor that increases default risk for vulnerable companies.
Companies with uncertain outlooks struggle first to secure funding, and even if they borrow, they must shoulder higher interest costs.
Deirdre Dunn, head of rates at Citigroup, was pessimistic, saying that "if the bond selloff gains momentum, defaults will begin to rise."
Dunn warned that once defaults start to rise, the shock will spread to equities as well. "We do not want bond-market stress to spill over into stocks, but the risk is real, especially for high-valuation names," she said.
\r\nThose concerns hit the stock market that day.
\r\nShares plunged, led by semiconductors whose valuations had already risen. The three major indexes on Wall Street each fell more than 1%, while Intel and Micron both dropped more than 6%.
\r\nNVIDIA Corporation also plunged more than 4%.
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dympna@fnnews.com Song Kyung-jae Reporter