Treasury yields return to 2002 highs, stocks pull back after record day

Yields on 10- and 30-year U.S. Treasuries returned to 24-year highs on Wednesday as oil prices resumed their rise. U.S. stocks opened lower as a result, after the S&P 500 and Nasdaq Composite set fresh records a day earlier. Investors are concerned about accelerating inflation and the prospect of further interest-rate hikes by the Fed.

As of this writing, the 30-year U.S. Treasury yield had risen as high as 5.73% in U.S. trading on Wednesday, while the 10-year yield reached 5.36%, their highest levels since 2002, CNBC reports. The bonds had reached these levels not long ago before a modest pullback in yields took place. Bond prices and yields move in opposite directions.

The broad-market S&P 500 fell 0.4% in the opening minutes of Wednesday’s trading, while the tech-heavy Nasdaq Composite lost 0.6%. Both indexes retreated from the record levels reached Tuesday. The blue-chip Dow Jones Industrial Average declined 0.7%. Brent crude ticked up 1.2% to $101.80 per barrel, having reached $102.40 earlier in the day. U.S. benchmark WTI added 0.7% to $90.10 per barrel.

The moves in U.S. debt markets spilled over to Europe, sending the yield on 30-year UK government bonds back to 6%, while French sovereign yields rose as much as 14 basis points, Bloomberg noted.

Bond yields resumed their rise after another increase in oil prices fueled concerns about accelerating inflation and further interest-rate hikes by central banks, Bloomberg argues. Traders have expanded their short bets on U.S. government bonds, which signals that the selloff may have further to run.

Oil was pushed above $102 per barrel in particular by fresh attacks on Saudi Arabia by Yemen’s Houthis rebels. In addition, Iran has stepped up attacks on tankers in the Strait of Hormuz, as Bloomberg reported a day earlier. This eclipsed arguments from some investors that the bond-market decline was overdone and yields looked attractive, Bloomberg writes.

“We continue to think the market remains caught between attractive outright yield levels and an oil story that refuses to fade,” Bloomberg quoted Mizuho strategist Evelyne Gomez-Liechti as saying.

Minutes from the Fed’s September meeting will be in focus on Wednesday as investors look for clues about the next steps in U.S. monetary policy. The swaps market is now pricing in a 24% chance of another Fed rate hike this month, while fully pricing in at least one more increase by the end of the year.

The renewed rise in yields has been driven largely by a higher term premium – the extra yield investors demand to hold long-term bonds – which has climbed since the Fed’s September meeting, Bloomberg reports. According to Bloomberg Economics data, the term premium on 30-year Treasuries reached its highest level since 2011 on Tuesday.

“The bond bear market since the start of the year is primarily a story of central bank repricing,” BofA rates strategist Ralf Preusser said in the Bloomberg reporting.