This has moved 48 basis points in 16 days. The chart of the 10-year yield looks similar. It’s moved 52 basis points since the beginning of the month.
Why?
Is the market suddenly becoming concerned with overindebtedness? Related to that, are the bond market vigilantes finally showing up to punish the egregious deficit spending and government handouts in an economy that’s running at “above trend” growth.
Is it a bet that inflation will reignite under the policies of the next administration?
The sharp rise in yields isn’t specific to the U.S. It’s global. But then again, so is the overindebtedness problem.
But, if we look at these three points denoted on the chart above, each has a commonality: The Israel-Hamas War.
The Yom Kippur War started on October 6, 1973. It began by a surprise attack on Israel by Egypt and Syria.
Almost 50 years to the day (50 years and one day), Hamas launched a surprise attack on Israel last October.
That’s point number 1 on the chart.
And with that attack on Israel, suddenly there was risk that retaliation could devolve into direct confrontation with Iran, and ultimately a global war. It was a global war flashpoint.
Where does capital tend to flow in times of heightened risk? U.S. Treasuries (bond prices up, yields down).
In this case, it went the opposite way.
Over seven days, the 10-year yield went UP 50 basis points, crossing the 5% threshold. It fell only when the Fed relented and signaled the end of the tightening cycle, because a 5% 10-year yield had tightened financial conditions — unwelcomed by the Fed.
How did other markets respond to the attack in October? Gold went up 11% in ten days. The S&P 500 went down 5%, before bottoming on the Fed signal. Oil went up 10% and then down 10%.
Let’s look at point number 2 on the chart. It’s April.
What happened in April?
Escalation. Israel conducted an airstrike on the Iranian consulate in Syria killing the leader of the Iranian Revolutionary Guard.
Stocks fell 6% in fourteen days. Gold went to new record highs, up 9% in ten days. Oil went up, then down. Once again, the 10-year yield went UP, not down — from 4.19% to 4.73% in nineteen days.
Fast forward to today, and we have another sharp move higher in yields, of a magnitude similar to these two periods we discussed above. And we have escalation again — which may, at this point, become a full-blown war between Israel and Iran.
Gold is up almost 6% in eight days. But stocks haven’t done much. And oil, the first move has been down.
So, given the discussion above, why would U.S. Treasury yields move higher if the risk of global war was heightened — and at a time when global capital should be flowing into the relative safety of U.S. Treasuries (demand that would put downward pressure on yields)?
Why higher? In a wartime scenario, there would be no global government fiscal restraint – quite the opposite.
