Yields cooled after a relentless run-up, helped by cheaper oil taking some heat out of inflation jitters. Oil prices slipped Tuesday as indications grew that more barrels were making it through the Strait of Hormuz.
That pause interrupted a global bond selloff fueled by inflation fears tied to the US-Iran war and by wagers on a more aggressive Federal Reserve in light of resilient US data. Put simply, yields are hovering around levels last seen in 2002.
Speaking Monday evening at a fireside chat in Pennsylvania, Treasury Secretary Scott Bessent tried to steady nerves, saying a combination of economic growth and spending restraint would "very quickly" change the trajectory of federal borrowing and that the government would start "bending that curve."
Plenty of investors were unconvinced. Bridgewater Associates founder Ray Dalio cautioned that the US is approaching the end-stage of its debt cycle, and that it could encounter a crisis in the next three years if spending continues to exceed revenue. He also flagged the possibility that appetite from China and Japan could fade; both rank among the largest foreign holders of Treasuries. "The market is likely to be very skeptical, given the deficit is 6% and there is no plan to reduce it," said Gareth Berry, strategist at Macquarie. "A stated ambition is not a plan."
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Bloomberg macro strategist Skylar Montgomery Koning noted, "The past week's data has been dovish leaning making an October hike less likely, but they haven't been weak. The economy is holding up against high yields and financial conditions remain loose. Until there's evidence that rates are actually biting, which is unlikely in a data-light week, it's hard to see a significant Treasury rally."
HSBC's team sees longer maturities underperforming and expects the spread between 5- and 30-year yields to widen. As US rates strategist Dhiraj Narula put it, "The surge in volatility, coupled with a lack of any clear technical resistance at these levels from recent history has, in our view, kept many investors on the sidelines despite the growing optical appeal of elevated long-end rates." The bank also called market pricing for roughly 80 basis points of Fed hikes next year "excessive." Energy is a key swing factor too. Oil has steered bond market swings ever since the US-Iran conflict kicked off in late February, and Schroders fund manager James Ringer said the market won't steady without cheaper crude and refined products. "To see a meaningful rally across the curve, the number one thing you need to see is energy prices starting to decline," he said. "That's not just crude, that's got to be the refined products as well."
Benchmark yields edged down, with the 10-year at 5.28% and the 2-year at 4.8%, but fiscal worries and the path of energy still loom large. If fuel costs keep retreating, that could ease pressure on bonds. Until there is clear evidence that higher rates are biting and Washington can narrow the deficit, expect choppier income streams and more day-to-day swings.
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