Treasury Yields Jump Again for the Fifth Week in a Row

Following stronger-than-anticipated retail sales, US Treasury yields escalated as investors contemplated the Federal Reserve's potential rise in rates later this year. The Fed’s minutes from their July meeting, disclosed on Wednesday, indicated that most participants anticipate substantial inflation risks which may necessitate further monetary policy tightening.

Benchmark 10-year Treasury yields rose 10 basis points to 4.25%, returning to 2007 levels. Two-year yields closed at 4.94%, up 5 basis points. The greenback surged to two-month highs (103.325), up 0.46% for the week. 

Furthermore, the Federal Reserve continues to pull money out of the financial system, shrinking its balance sheet with a $62.5 billion reduction over the week ended on August 16. The Fed’s balance sheet runoff is another dynamic at work that could potentially impact the maintenance of higher interest rates as significantly as increasing the Fed funds rate had. 

In Europe, Treasury yields steadied - German 10-year Bund at 2.62% and French 10-year OAT at 3.17%.

Against this backdrop, the umpteenth uptick in US Treasury yields put corporate IG bond ETFs under significant pressure, with net outflows of around $1.73 billion globally.

IG corporate bond prices slid again. In Europe, the IBOXX € Liquid Corporates index edged down 0.20% for the third week in a row. In the U.S., the IBOXX $ Domestic Corporates index dropped by 0.95%, extending its losing streak to five weeks.

Unlike last week, high yield bonds took the hit, losing 0.30% in Europe (IBOXX € Liquid High Yield Index) and 1.10% in the U.S. (Markit iBoxx USD Liquid High Yield Capped Index) with significant outflows ($1.68 billion globally). Emerging debt in local currencies plunged 1.74%, as the US dollar strengthened again.