US Treasury Secretary Scott Bessent recently declared the global rise in bond yields, driven by inflation concerns, to be “transient.” This comment, made after meetings in Tokyo, mirrors similar assertions from US Federal Reserve chairman Jerome Powell in 2021, when post-pandemic inflation proved more persistent than anticipated. Bessent’s effort to calm markets comes as America’s national debt nears US$40 trillion, with daily interest payments costing approximately US$3 billion, complicating government funding amid rising yields.
However, bond markets worldwide reacted with a “sea of red,” as prices fell and yields rose significantly. Japan’s 30-year government bond yield breached 4 per cent for the first time, while British 30-year gilts reached a 28-year high. The US Treasury was forced to sell 30-year bonds at a 5 per cent yield, a level not seen since 2007, and the benchmark 10-year Treasury yield closed at 4.6 per cent after its largest weekly rise in a year. Adding to this outlook is what analysts term the “biggest energy shock in history,” with the Strait of Hormuz stalemate pushing Brent crude prices to US$110 a barrel and potentially higher, exacerbating global inflationary pressures.
This bond market turbulence sent a “shudder” through equity investors, leading to a 1.2 per cent fall in the S&P 500. US markets strategist Ed Yardeni highlights geopolitical risk, political instability, rising government debt, and persistent inflation as key drivers of investor unease, suggesting “bond vigilantes” are urging the US Federal Reserve to reconsider its easing stance. Bank of America strategist Michael Hartnett warns that sustained 30-year US Treasury yields above 5 per cent, combined with US inflation potentially surpassing 5 per cent by November, could place significant pressure on equity markets. Historically, the S&P 500 has fallen by 4-7 per cent in the months following US inflation crossing the 4 per cent mark.
