US 10-year bond yields reach 5.20%

Government bond markets remained under pressure yesterday as yields rose further – albeit this was mostly concentrated at the long-end of curves – with the benchmark US 10-year  yield climbing to its highest level (5.20%) since 2007. In FX, the dollar remained in the ascendency, nudging higher again, though the euro and sterling are both marginally firmer against the US currency this morning at around $1.1385 and $1.3225 respectively (versus lows yesterday of about $1.1360 and $1.32). EURGBP continues to edge up, trading just north of the £0.86 level at the start of play.

Benchmark US 10-year bond yields rose by almost 10bps to multi-year highs, while 2-year yields increased by just a couple of basis points on the day. Short-dated German and UK yields were flat to a touch lower, while 10-year yields increased by around 5bps and 3bps respectively. In equity markets, the S&P 500 managed to erase initial losses to end broadly flat, while European stocks shed around half a percent for a second day running.

A couple of Bank of England MPC members yesterday signalled they may soon support an increase in interest rates. One of these members, Lombardellii,  said that, while the indirect effects of the energy price shock “have so far been smaller than expected”, the longer energy prices stay high “the more likely indirect effects are to eventually come through”, hence “on that basis, (monetary) policy is increasingly likely to need to tighten.” Similarly, her MPC colleague, Breeden said “the larger and longer the (energy price) shock, the more likely it is we will see the material second-round effects policy needs to respond to.” The market is currently pricing in about an 85% chance of a 25bp rate hike at the MPC’s next meeting in November.

Fed member Paulson says inflation risks have grown, noting that while tariff-related price pressures have eased, “price pressures from the conflict in the Middle East and the AI buildout” have increased. At the same time, economic growth has “firmed up a little” and the labour market has “strengthened a touch”. She adds that, “if economic conditions evolve as I expect, some modest further (policy) tightening may be warranted.” The market currently sees about a circa 70% chance of a 25bps rate hike at next month’s Fed meeting.

For the day ahead, economic data due include money supply/credit growth (August) in the Euro area and capital goods orders (August) and the University of Michigan consumer  confidence index (September, final reading) in the US. A number of central bank members, including Bank of England Governor Andrew Bailey, are scheduled to speak over the course of the day.