Global bonds sold off sharply on Friday as investors grappled with persistently higher inflation amid the ongoing energy crisis.
Oil prices rose after the U.S.-China summit, but there was no sign that Beijing would rely on ally Iran to reopen the Strait of Hormuz.
A series of U.S. debt auctions last week showed tepid demand for longer-dated Treasuries amid hotter-than-expected new consumer and producer inflation data.
On Wednesday, the U.S. Treasury Department sold $25 billion in 30-year bonds at a 5% yield for the first time since 2007. Prior to this, no 30-year Treasury note had an interest rate higher than 4.75%.
This is in sharp contrast to mid-February (just before the US-Israeli war against Iran), when demand for US Treasury debt issuance reached the highest level in the 30-year auction history.
In addition to the latest so-called long-term bond auctions, demand for three- and 10-year Treasury notes sold earlier this week was lower than expected.
Unease among bond investors is becoming a trend. In March, two-year, five-year and seven-year Treasury auctions all saw weak demand, forcing yields higher than expected.
Rising yields have pushed up interest costs by as much as $1 trillion a year, exacerbating budget deficits and further increasing the overall debt burden.
This year’s deficit is already on a troubling path. Last week, the U.S. Treasury announced it expected to borrow more than expected in the current quarter as cash inflows were weaker than initially expected.
At the same time, the federal government must issue trillions of dollars in new debt every year to finance the deficit and must provide yields attractive enough to investors who believe inflation eats away at fixed income.
Previous supply shocks were seen as one-off events that would cause temporary spikes in prices. But shocks have emerged in recent years, including the coronavirus supply chain disruption, Russia’s invasion of Ukraine, President Donald Trump’s tariffs and now the war with Iran.
That’s keeping inflation high, making Fed policymakers less willing to “look past” short-term price spikes to maintain future rate cuts.
“More than five years of above-target inflation have reduced my patience to ‘look at’ another supply shock,” Boston Fed President Susan Collins said on Wednesday. “While this is not my most likely outlook, I can envision a scenario where policy tightening is required to ensure inflation returns to 2% in time.”
