Ever Higher Interest Rates

The rise in long-term U.S. Treasury yields continues, mainly due to structural changes that are expected to result in high inflation. These changes include the transition to alternative energy, de-globalization, escalating defence costs, as well as the increased negotiating power of workers as evidenced by the latest talks in the automotive industry. In addition, a series of recent economic data has led investors to conclude that the Federal Reserve will maintain tighter monetary policy for longer to curb inflation, triggering a sell-off in the bond market.

The yield on the 30-year Treasury bond was up more than a quarter percentage for the week from 4.70% to 4.97% while the 10-year Treasury yield gained 22 basis points from 4.58% to 4.80%. To measure the extent of the disaster for bondholders, the iShares 7-10 Year Treasury Bond ETF has lost almost a quarter of its value since January 2021, 21% since January 2022, and 5.4% year-to-date. The iShares 20+ Year Treasury Bond ETF has lost 43% of its value since January 2022, and 14% year-to-date.

In Europe, 10-year German bunds hit a 3% yield for the first time since 2011 before falling back to 2.88%, up 4 basis points for the week. Similarly, the yield on the French 10-year OAT jumped to 3.48%, up 8 basis points, after topping 3.60% on Wednesday.

The Treasury rout reverberated throughout the investment grade corporate bond prices. The IBOXX € Liquid Corporates index slid 0.50% extending its losing streak to five weeks. In the US, the IBOXX $ Domestic Corporates index fell 0.98%. High yield bonds did not perform any better, losing 0.69% in Europe (IBOXX € Liquid High Yield Index) and 1.33% in the U.S. (Markit iBoxx USD Liquid High Yield Capped Index). Lastly, emerging debt in local currencies plunged 2.60%.

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