US treasury yields have surged to fresh 24-year highs as oil prices jumped above $100 a barrel, reigniting concerns about inflation. The benchmark 10-year yield climbed 4.4 basis points to 5.316% after hitting a peak of 5.364%. US 30-year yields also touched a 24-year high, rising 5.5 basis points to 5.696%. This increase in yields suggests that treasury prices are lower. The jump in oil prices is attributed to supply constraints from a storm heading for US oil-producing regions and attacks by Yemen's Iran-backed Houthis on Saudi Arabia.
The oil price increase had a significant impact on treasury yields. Brent crude rose 1.1% to $101.69 a barrel, while US crude increased 1.34% to $90.64 a barrel. According to Thomas Urano, co-chief investment officer at Sage Advisory, the attitude towards inflation pressure moves in line with oil price fluctuations. As oil prices go up or down, it affects the market's perception of inflation. This has led to renewed selling pressure on US treasuries.
The US debt market was also affected by reports that Elon Musk's SpaceX was seeking $40bn to buy Nvidia chips. The company plans to raise about $10bn in bank loans and $30bn in investment-grade debt for the chip order. This could revive concerns that large-scale corporate borrowing is competing with long-dated US treasuries for investor capital, analysts said. A wave of debt issuance from hyperscalers has added to supply pressures in a market grappling with heavy government borrowing needs and persistent uncertainty about inflation.
The increased supply of debt has created a crowding-out effect or competition for capital. According to Urano, the demand for private sector borrowing, particularly for long paper, has grown significantly, creating this competition. This has contributed to the surge in treasury yields. The US treasury was scheduled to sell $39bn in reopened 10-year notes, which analysts at JPMorgan expect to be absorbed smoothly by the market.
JPMorgan analysts pointed out that the 10-year note is undervalued at current levels. They expect the auction to be digested smoothly, given supportive valuations historically, fundamentally, and locally. The 10-year yield has advanced 43 bps since the last auction last month. This could have implications for future treasury yields.
The release of the Federal Reserve's September meeting minutes will offer more clarity on how policymakers are interpreting the rise in long-term yields. If officials view higher long-term rates as sufficient tightening, expectations for another hike could stall even if treasury yields remain elevated. This could have significant implications for the future of monetary policy.
The yield curve steepened on Wednesday as the spread between two-year and 10-year yields widened to 52.2 bps from 48.1 bps. The curve had reached its steepest level since mid-August after long-dated yields rose more sharply than shorter-dated ones, a move known as a bear steepener. This shift in the yield curve has significant implications for investors and policymakers.
Key points
- US treasury yields have surged to 24-year highs as oil prices jump above $100 a barrel.
- The increased supply of debt from corporate borrowers such as SpaceX has created a crowding-out effect or competition for capital.
- The release of the Federal Reserve's September meeting minutes will offer more clarity on how policymakers are interpreting the rise in long-term yields.
