The short end and the long end went different ways
On Tuesday the 30-year US Treasury yield reached 5.324 per cent, its highest since June 2007, and the 10-year yield stood at 4.736 per cent. The same session lifted long-dated yields in other markets: the 10-year Japanese government bond yield rose 2.5 basis points to 2.945 per cent, a three-decade high, and the 10-year UK gilt yield rose 2.6 basis points to 5.076 per cent, while Germany's 10-year yield reached its highest level since 2011 and France's a 16-year peak.[1]
The policy path priced at the front of the curve moved the other way. In a Reuters poll conducted from 12 to 17 August, 90 per cent of economists said the Federal Reserve would leave its policy rate in the 3.50-3.75 per cent range at the September meeting. On Monday the dollar fell to its lowest level in more than two months as investors trimmed expectations of a US rate increase, and the euro reached a two-month high of around 1.1614 dollars.[4], [5]
Inside the US curve that split is measurable. So far this month the 30-year yield has risen 13 basis points while the 2-year rate has fallen 12 basis points. Last week the Treasury sold 25 billion dollars of new 30-year bonds at 5.216 per cent, the highest for such an auction since 2001.[3]
Oil supplies the excuse, issuance supplies the volume
Brent crude rose above 90 dollars a barrel for the first time since 30 July and traded at 91.63 dollars on Tuesday morning, after the two-month window to negotiate an end to the war on Iran expired on Monday without a deal. Analysts at Deutsche Bank wrote that the higher price reflects investors pricing in a more extended closure of the strait of Hormuz.[2]
Read together, those two observations make the long end hard to explain through the expected policy path alone. Had the market been repricing the policy rate, the 2-year would have moved with the 30-year rather than against it. The explanation that fits better is compensation: the return investors demand for holding duration is rising while the expected average policy rate sits roughly where it was. Dan Coatsworth of AJ Bell drew the same distinction, saying long-dated yields reflect concern about high government borrowing and the extra compensation investors want for the risks of holding long-dated bonds. The alternative deserves a hearing too: a durable oil shock lifts the thirty-year inflation expectation far more than the two-year one, and steepens the curve with no change in compensation at all. Price alone does not separate the two readings.[1], [3]
The supply side of that argument now has two sources. Neil Wilson of Saxo UK named government issuance and corporate issuance funding AI capital spending in the same breath, and higher defence spending is expected to add to borrowing in Germany and the UK. For a bond investor the question is who else is bidding at these levels. As this column wrote on 14 August from the auction internals, the buyer of long-dated government debt had to be persuaded with price; a week later that persuasion shows up in the secondary market as a multi-decade high in yield.[1], [6]
What would separate the two readings?
One observation would do it. If the compensation reading is right, the gap between the 30-year and the 2-year yield keeps widening into the Federal Reserve's 15-16 September meeting even on days when the expectation of a hold firms; the baseline to measure from is this month's 13 basis points up at the long end against 12 down at the short end. If the gap narrows instead as the policy path settles, the inflation-expectations reading has the better claim, and the long end was pricing oil all along.[3], [4]