The 10-year US Treasury yield crossed 5% for the first time since 2007 this morning. Globally, there is a concerted need to get the public finances in order, to put a stop to this bond rout. But President Biden has asked Congress for a national security package worth $106bn, including $75.7bn in extra funding for Ukraine and Israel. The US secretary of defence said on Sunday he was “concerned about potential escalation” of fighting in the Middle East.
Jerome Powell’s message was clear last week: the bond market is doing a lot of the tightening now. But the Fed chair is walking a tightrope here. If all the onus is put on longer-term yields, the bond market may lose confidence that the Fed is serious in keeping inflation in check. This at a time of clear geopolitical risk for oil. The jump in breakeven inflation rates, points in this direction. If the Fed loses credibility, the risk is that the bond market will over-tighten for them.
Events in Japan are an additional catalyst for the latest move higher in sovereign bond yields. The LDP lost one of two seats in Sunday’s by-elections, and Prime Minister Kishida doubled down: “The No. 1 priority is the economy.
Better-than-expected PNSB ex numbers in the UK could not prevent the 30-year Gilt yield from rising to a new high on Friday. Conservative Party politicians are clamouring for tax cuts, a real possibility, given that Rishi Sunak is well on target to halve headline inflation.
Finally, CGB yields are climbing, and Chinese equities are sliding. There are signs that capital flight is accelerating, as the authorities struggle to support the RMB.
