Yields on U.S. Treasury bonds shot up to levels not seen since early 2007 – the start of the subprime mortgage crisis - following Jerome Powell’s speech. The latter suggested that above-average growth or an excessively strong labour market might require further tightening of monetary policy. He also pointed out emerging risks and the necessity to proceed cautiously. However, investors are increasingly apprehensive about the possibility of prolonged high rates.
The 10-year Treasury yield jumped to 4.93%, up 30 basis points for the week, while the 2-year yield gained 6 basis points to 5.11% from 5.05%. The U.S. yield curve has dramatically flattened since the end of June.
In addition to threatening hopes for a soft landing of the U.S. economy, this abrupt rise in Treasury yields has had repercussions elsewhere. The Bank of Japan intervened in the Japanese government bond market on Friday for the fifth time this month after its 10-year yield pushed to a fresh decade high above 0.8%. In Europe, the 10-year German bund yield rose to 2.89% from 2.74%. Similarly, the yield on the French 10-year OAT gained 15 basis points to 3.52% from 3.37%. The Italy 10-Year Government bond yield was trading at 4.92%, up 16 basis points week-over-week.
The surge in Treasury yields logically had a negative impact on the other bond asset classes. The IBOXX € Liquid Corporates index slid 0.78% over the week. In the US, the IBOXX $ Domestic Corporates index plunged 1.61%, bringing its year-to-date performance back to negative territory (-1.24%). High yield bonds did not perform any better, losing 0.86% in Europe (IBOXX € Liquid High Yield Index) and 1.19% in the U.S. (Markit iBoxx USD Liquid High Yield Capped Index). Lastly, emerging debt in local currencies fell 0.67%.