By Mike Dolan
Sept 24 (Reuters) – Just as some investors were wondering whether it was time to return to battered bond markets, Wednesday’s fresh rout offered a clear answer: not yet.
US Treasury and global government bond yields soared to new multi-decade highs following a storm of new information showing that US and European business activity accelerated at the fastest pace in years last month – with input prices still rising higher to boot.
That added fuel to central bank interest rate rise concerns, and centrist Federal Reserve board member Michael Barr on Wednesday indicated more Fed tightening would be needed to tame inflation.
Money markets ramped up bets on another Fed rate rise as soon as next month, with futures now pricing a two-thirds chance of another hike from both the Fed and the European Central Bank in October.
The latest bond selloff rippled around the world on Thursday, with Japan’s 10-year yield hitting its highest in 30 years as Tokyo markets returned from a three-day holiday.
And New York Fed boss John Williams, who only recently argued that Fed rates were in a good place, reinforced Barr’s new message in London today, saying the Fed would likely need to hike again this year, even after last week’s move. The US Treasury’s 30-year ‘long bond’ yield surged anew after that to its highest in 22 years.
The debt market mood was soured further on Wednesday by warnings about rising government debt levels from the OECD, while the Institute of International Finance said the global government debt servicing bill had risen to more than $3.5 trillion – bigger than spending on defence, energy or AI.
What’s more, the bond angst flew in the face of the latest US Treasury buyback programme, which some market players reckoned was now becoming more of an irritant than a balm.
Poor demand for a $70 billion sale of 5-year Treasury notes on Wednesday, meantime, saw yields on that paper top 5% for the first time since 2007.
The other hit to bond markets on Wednesday came as oil prices climbed back into triple-digit territory on disappointment at the lack of a breakthrough in US-Iran meetings around the UN annual gathering. And mooted plans for a US diesel export ban also saw fuel prices outside the States climb further, though the White House later rowed back those reports.
The big political set piece on Thursday is the summit between President Donald Trump and China’s Xi Jinping, meantime, and there’s some trepidation about reports that the trade truce between the two will only be extended from November to January.
The leaders will also discuss AI risks and ways to control them, with OpenAI’s reported hacking of an Australian government website and the appearance of AI bosses at the UN meeting all amplifying the drumbeat for more controls on the tech.
Neither Washington nor Beijing have shown any appetite to slow down AI development, and both sides have suggested the warnings are conspiracies to hold the other back in the AI race.
Chart of the day
Japan’s SoftBank raised $11.1 billion in dollar- and euro-denominated bonds this week in the largest high-yield corporate bond sale globally on record, as the tech investment conglomerate seeks to fund its mammoth bet on OpenAI.
The funding follows a 1 trillion yen ($6.3 billion) bond issue aimed at retail investors this month and is likely to prompt further scrutiny of SoftBank’s finances, which could become vulnerable should market sentiment towards OpenAI and the AI sector weaken significantly.
The cost of insuring SoftBank’s debt against default has shot up, with the five-year credit default swap spread exceeding 400 basis points this week, compared with around 280 basis points in June.
Today’s events to watch
• Trump-Xi summit in Washington
• US weekly jobless claims (8:30 a.m. EDT), August new home sales (10 a.m. EDT)
• US 7-year note auction (1 p.m. EDT)
• New York Fed’s John Williams, Richmond Fed’s Thomas Barkin, Cleveland Fed’s Beth Hammack and Philadelphia Fed’s Anna Paulson all speak
Before you go, listen to the latest episode of the Morning Bid daily podcast, where we discuss the latest bond selloff and more.
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(Editing by Jan Harvey)
