Treasury yields moved broadly higher on Monday, with investor worries over persistent inflation, a widening US fiscal deficit, and increased government debt supply intensifying as international oil prices climbed once again. The selling pressure was particularly pronounced at the long end of the curve, pushing the 30-year Treasury yield to its highest level since 2007.
As of Monday, the 30-year Treasury yield rose more than 4 basis points to 5.311%, reaching its highest point since June 2007. The 10-year Treasury yield, a key reference for financing costs on mortgages and auto loans, climbed over 2 basis points to 4.724%, while the 2-year Treasury yield, more sensitive to near-term Federal Reserve policy expectations, increased more than 1 basis point to 4.182%. Bond prices move inversely to yields.
Higher oil prices were among the factors driving yields upward on the day. The 60-day peace agreement between the US and Iran expired on Monday, with reports indicating Tehran has ruled out extending the deal. A senior Iranian official also stated that if diplomatic efforts with Washington fail, the country would adopt an offensive stance, reigniting market concerns over Middle East tensions and energy supply risks. In response, US WTI crude futures rose 2.6% on Monday to settle at $84.50 per barrel, while international benchmark Brent crude gained 2.7% to close at $90.87 per barrel.
Energy prices have remained elevated since the Middle East conflict erupted months ago, intensifying worries about inflationary pressures, although relatively mild US inflation data in recent months has somewhat eased investor concerns. However, Barclays suggests that the primary drivers behind the recent rise in Treasury yields may not be inflation, but rather the US fiscal deficit, a wave of large-scale corporate bond issuance from the AI investment boom competing with Treasuries for capital, and investors demanding a higher term premium.
Anshul Pradhan, head of US rates research at Barclays, noted that the noteworthy aspect is not these pressures themselves, but that they have already become strong enough to outweigh the positive impact on the bond market from some weak economic data. He indicated that three separate economic data points this month should theoretically have pushed yields lower, yet long-end Treasury yields continued to climb. Last Friday, US retail sales for July unexpectedly fell 0.6% month-over-month, and the previously released July Producer Price Index was flat, both suggesting some easing in economic and inflation pressures. Nevertheless, Treasury yields did not decline but continued to rise, further signaling that investor focus on long-term fiscal and bond supply issues is increasing.
The US fiscal situation is also adding pressure to long-term Treasuries. Data released by the US Treasury last week showed the July federal budget deficit reached its highest monthly level in more than five years, with increased Medicare spending and substantial interest costs on the national debt serving as key factors driving the deficit wider. The cumulative fiscal deficit for this fiscal year has also surpassed the same period last year.
Anthony Saglimbene, chief market strategist at Ameriprise, stated that investors are increasingly evaluating US Treasuries from the perspective of long-term fiscal sustainability, while the influence of traditional factors such as inflation, monetary policy, and economic growth has relatively diminished for the long end of the yield curve.
Market attention will now turn to the Federal Reserve's release on Wednesday of the minutes from the July Federal Open Market Committee meeting, as investors seek further clues on the direction of future interest rate policy. On July 29, the Fed voted 9-3 to hold the federal funds rate target range steady at 3.5%-3.75% for a fifth consecutive meeting. At that time, Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari, and Dallas Fed President Lorie Logan all dissented, advocating for a 25-basis-point rate hike. With recent inflation data cooling but long-term Treasury yields continuing to climb, discussions within the Fed over whether further policy tightening is needed will remain under close market scrutiny.
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