Bond yields have risen to levels last seen on the eve of the Global Financial Crisis, roughly 19 years ago. The 10-year yield rose to 4.68%, a 16-month high, while the 30-year yield rose to 5.2%, hitting its highest level since July 2007.
What is driving yields this high? The driving causes behind the increase in bond yields — as a result of investors selling bonds — could be twofold. One is the expectation that the US Federal Reserve will raise interest rates rather than lower them. Second, governments around the world may face fiscal pressures as investors seek a bigger risk premium.
A similar trend is unfolding globally, with 30-year UK gilt yields surpassing 6% and Germany’s long-term borrowing rate trading at a 2011 high.
At the heart of it all is the energy shock. The prolonged US-Iran conflict has effectively kept the strategic Strait of Hormuz closed to shipping traffic, pushing oil prices higher. Since the war began, oil prices have been higher by 40% and trade at around $111. The surge in oil prices has intensified inflationary pressures worldwide. As a result, market expectations have shifted away from anticipated Federal Reserve rate cuts this year toward the possibility of another rate hike before year-end.
Before the Iran war, it was expected that the US Fed could cut at least twice in 2026. Today, there is a growing call for a rate hike. CME FedWatch shows a 40.7% probability of a rate hike in the December FOMC meeting.
The April inflation data only added fuel to the fire. The US Federal Reserve and the markets were taken aback by the April inflation report. The Consumer Price Index (CPI) surged to 3.8%, a three-year high. The Producer Price Index (PPI) also saw a significant 6% increase, the largest since 2022. Amidst this backdrop, investor concerns mount that accelerating inflation will force central bankers to raise interest rates.
Anna Paulson, president of the Philadelphia Fed Bank, stated that she was in favor of keeping interest rates unchanged at the 3.5%-3.75% range for the time being, and emphasized that any decrease in borrowing costs would require consistent progress in reducing inflation.
So why are bond yields rising so sharply? Bond yields move inversely to bond prices. When investors sell their existing bond holdings, yields rise. The sell-off happens with the expectation that new bonds will carry higher rates. Investors also demand a higher premium to buy longer-maturity debt due to growing government deficits. The way the 30-year bond yield has moved to a 19-year high shows investors expect rates to remain higher-for-longer.
Barclays Plc and Citigroup Inc. strategists have cautioned clients that rates might exceed 5.5%, a level last seen in 2004. The chairman of BlackRock’s research team has also advised investors to cut their exposure to developed-market government bonds, particularly Treasuries, in favor of stocks.
Beyond inflationary reasons, investors also shun bonds when governments run fiscal deficits, demanding higher rates instead. As a result, equity markets see a sell-off if yields go higher. With nowhere to go, money flows into US Treasuries when investors rethink their allocations — insofar as they can earn a higher return by investing in government bonds.
Rising Yields and Gold Price
When yields rise, the dollar strengthens, increasing the opportunity cost of holding gold, a non-yielding asset. Consequently, investors tend to avoid gold during this period. Given the current pressure on gold, the downtrend is likely to persist unless yields decrease soon.
US Stock Market
On Wall Street, the US stock market has reached record highs, with the S&P 500 and Nasdaq Composite up 7.4% and 11% respectively since the year’s start. The Dow Jones Industrial Average has surpassed 50,000, reflecting a 3% increase year-to-date.
However, the risk to equities runs high when bond yields soar. “This rise in yields hit technology and growth stocks particularly hard, as higher interest rates increase the cost of capital, reduce future valuations, and limit appetite for high-multiple assets. The Nasdaq once again proved to be one of the most sensitive indexes to this,” said Antonio Di Giacomo, Senior Market Analyst at XS.com.
“This matters because higher yields reduce the present value of future earnings, making growth stocks, AI names, and high-valuation technology companies more vulnerable to profit-taking,” said Aslam.
In the near future, keep an eye on bond yields — any big sell-off in bonds could trigger a major pull-back in equity valuations. Will the AI-led names on the indices be the saviour again? Only time will tell.
Disclaimer: The information provided in this article is for informational purposes only and should not be construed as investment advice. Views and opinions expressed by experts, analysts and strategists are their own and do not necessarily reflect the editorial position of this publication. Readers are advised to consult a qualified financial advisor before making any investment decisions.
