Global Bond Yields & Oil Prices Upend Markets Before Fed Rate Hike
Market Turbulence Ahead of Federal Reserve Rate Decision
By Jamie McGeever
Bond Yields and Oil Prices Surge
ORLANDO, Florida, Sept 15 (Reuters) - Investors must have had a strong sense of deja vu on Tuesday, as global bond yields hit fresh multi-year highs and supply fears yanked oil prices further above $100 a barrel, delivering a powerful one-two blow to stocks. Not the best way for world markets to prepare for an expected interest rate rise from the Federal Reserve on Wednesday.
In my column today, I look at how the 10-year U.S. Treasury yield typically behaves when the Fed begins raising rates. It usually rises, unsurprisingly. But no two cycles are the same, and the circumstances around this particular cycle, should it unfold, are unique.
Today's Key Reads
Government Borrowing Costs and Currency Moves
• Government borrowing costs hit their highest since the 2008 financial crisis on Tuesday, with 10-year U.S. Treasury yields now above 5%, increasing pressure on heavily indebted borrowers that so far have been shielded by resilient economic growth.
• The fate of the sharpest yen rally in 18 months rests on the Bank of Japan breaking free of its cautious rate-hiking path, though it risks a sharp reversal if the currency again succumbs to the forces that dragged it to 40-year lows in July.
China's Industrial Sector and AI Risks
• China's industrial sector showed renewed strength in August as the AI-driven tech boom fuelled factory output, though sluggish consumption and a worsening investment slump reinforced concerns over deepening economic imbalances.
• If cutting-edge AI is truly powerful enough to end humanity, it may already be too powerful to slow down. With the technology now locked in a strategic arms race tied to national security, warnings about its risks may only speed up the dash for hegemony — and bring far greater government control with them. So says ROI's Mike Dolan.
Energy Infrastructure and Diesel Market
• An energy infrastructure truce that U.S. President Donald Trump brokered between Russia and Ukraine could reduce one of the biggest immediate threats facing the global diesel market. But it is unlikely to reverse the severe supply crunch that has emerged this year, argues ROI's Ron Bousso.
Today's Key Market Moves
Stocks and Sectors
• STOCKS: MSCI World hits 6-week low. UK -0.4%, Europe falls to 3-month low. Big three U.S. indices fall — S&P 500 -0.4%, Dow -0.6%, Nasdaq -0.8%. Brazil a notable outlier, +0.7%.
• SECTORS/SHARES: Nine sectors on the S&P 500 fall, two rise. Consumer discretionaries -1.8%, energy +2.2%.
Currency, Bonds, and Commodities
• FX: Dollar index rises for 5th day in a row. Dollar/yen regains 155.00.
• BONDS: Highest yields in decades. U.S. 10y 5.04%, highest since 2007; U.S. 30y 5.40%, highest since 2003. Japan 10y nudges 3%, highest since 1996. UK, French and German 10y yields highest since 2007, 2008 and 2009, respectively. U.S. 20y auction is soft.
• COMMODITIES/METALS: Oil posts highest close since May, Brent +3%, WTI +4%. Average U.S. diesel at record $6.2696/gallon. European nat gas -2%. Gold slips.
Today's Talking Points
BoE on the QT
Bank of England's Gilt Sales and Policy Shifts
The Bank of England is set to announce that it will stop selling 20- and 30-year gilts, relieving pressure at the long end of the curve and potentially freeing up some cash for finance minister John Healey, the Telegraph reported on Tuesday. The central bank will announce new plans for "QT" on Thursday, alongside its latest interest rate decision. The BoE — which has already scaled back the sale of longer-dated gilts — declined to comment on the report.
The BoE's QT has differed from other central banks', as its balance sheet reduction has included active bond sales, while the Fed and ECB have allowed the bonds they hold to mature rather than sell them. With the U.S. Treasury tripling buybacks of long-dated bonds, and the BoE now set to halt sales, it's clear that the global bond rout is unnerving policymakers.
Brazil Bucking Global Rate Trend
Brazil's Central Bank and Election Impact
It's not just the central banking heavyweights — the Fed, BoE and Bank of Japan — delivering their latest policy decisions this week. Brazil's central bank is expected to cut its benchmark Selic rate on Wednesday by a quarter point to 13.75% from 14.00%. It would be the fifth consecutive easing.
Brazilian interest rates are among the highest in the world among major economies. The "real" Selic rate is just under 10%, down from a 20-year high of over 11% earlier this year, and Brazil's 10-year sovereign bond "real" yield is 10.5%, the highest since 2008. This is the central bank's last meeting before the country goes to the polls on October 4 in what is looking like an incredibly close first round of voting in the general election.
US-China Dialogue
Upcoming Diplomatic Meetings and Market Implications
U.S. Treasury Secretary Scott Bessent and Chinese Vice Premier He Lifeng will meet this weekend ahead of the planned summit between presidents Donald Trump and Xi Jinping in Washington next week, Bessent said on Tuesday. There's no shortage of discussion points — Iran sanctions, trade, energy and resource security, widening global economic imbalances, and of course, all things AI.
Curiously, China has yet to officially confirm that the Trump-Xi meeting scheduled for September 24 will take place. Surely Beijing won't pull the plug at this late hour, will it?
What Could Move Markets Tomorrow?
Key Economic Events to Watch
• Japan machinery orders (July)
• UK inflation (August)
• Brazil interest rate decision
• U.S. retail sales (August)
• U.S. interest rate decision
Newsletter and Disclaimer
Want to receive Trading Day in your inbox every weekday morning? Sign up for my newsletter here. Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
(Reporting by Jamie McGeever; Editing by Nia Williams)