Long-term government bond yields rise for the 13th straight week in the US

Once again, long-term government bonds tumbled in the US sending the 10-year Treasury yield above 4.20% (4.22%,+20 basis points in five days, the highest level since June 2008) while the 2-year yield remained fairly stable week-over-week at 4.48%. The UTEN single bond ETF that invests in the 10-year US Treasury note was down 1.71% over the week (down 4% month-to-date).

At the risk of repeating a point that has already been made ad infinitum, this is the result of the Fed’s restrictive monetary policy. On the one hand, the US central bank is raising interest rates at the fastest pace in a single year since the 1980s. On the other hand, the Fed has started to shrink its balance sheet. More than $220 billion have been removed from the financial system since mid-April. In a nutshell, we should bear in mind that the Fed is no longer a liquidity provider with the end of the quantitative easing. 

That’s also why mortgage rates are growing rapidly. The current average rate for a 30-year fixed mortgage reaches 7.32% (+15bps over the week resulting in a 310 basis-point spread with the 10-year Treasury yield). Such a move may hurt the US economy as it has major implications for how much it costs consumers to finance their home, their car or anything else.

In Europe, the German 10-year yield added 7 basis points over the week (2.42%) while the French OAT yield with the same maturity closed at 2.99% (+4 basis points). The yield on Italy's 10-year government bond remained virtually unchanged at 4.78%. On the flip side, there was a bit of a turnaround in the UK. Prime Minister Liz Truss’ resignation eventually pushed Gilt yields lower (10-year yield down to 4.05% from 4.37%) in spite of the current uncertainty about the new race for the PM job.

For investors who hold investment grade corporate bonds, the nightmare continues with the twelfth consecutive week of losses: -0.40% for the Markit iBoxx Euro Liquid Corporates TR Index (down 15.54% for the year), and -0.69% for the Bloomberg Barclays Global Aggregate Corporate Bond TR Index in USD, bringing its year-to-date performance to -22.73%.

By contrast, high-yield bonds managed to stay above the flatline with the Markit iBoxx EUR Liquid High Yield TR Index up 0.02% (-13.83% YTD) and the Markit iBoxx USD Liquid High Yield Capped TR Index up 0.44% (-11.71% YTD). 

Emerging debt in local currencies did not benefit from the greenback’s weakness on Friday (dollar index below the 112 mark). It fell 0.79% for the week (-22.75% YTD).