US 10 year yield monthly
US 10-year yield monthly

This is the final week of September and it's increasingly clear that the theme of the month is bond selling. Today's price action highlights that with 10-year yields up 8.1 bps to 4.52%, which is a fresh high dating back to 2007.

That rise is also spilling over to USD/JPY, which is up 37 pips to 148.75.

For the real economy, the rise in 10-year borrowing costs is material. It's the benchmark for all global borrowing and pushes up corporate and household costs to new cycle highs.

The trigger today appeared to be German bunds, with yields there rising 7.5 bps to 2.81%, which is the highest since 2011. In turn, that led to a selloff in European equities and now US futures are down 0.4%.

BMO highlights a dynamic between stocks and bonds that's doesn't bode well for equities:

The price action since mid-September suggests that investors are revisiting the assumption that as long as the Fed contains inflation, the economic outlook will remain on solid footing. Embedded within this shift are the ongoing efforts of Fed officials to reinforce the messaging that while terminal might be near (if not already achieved), investors shouldn’t expect rate cuts for the foreseeable future. The ‘Fed-put’ has once again become topical in this context and while we struggle to believe it has been completely abandoned, one thing was made clear last year – it’s struck much lower than investors might have otherwise assumed. Said differently, in the wake of the selloff between January 2022 and October 2022 it became clear that the march toward higher policy rates wouldn’t be deterred by the sharp decline in equity valuations. The fact that stocks managed to recover most of the selloff sets the stage for another retest of investor resolve as global policymakers hold tight to the higher-for-longer messaging.

The trick to halting that dynamic will be a softening of the Fed's tone but that's tough to envision with oil prices marching higher.

The other concern is the term premium and rising US debt. The market still isn't taking that seriously given the enormous debt levels in Japan and elsewhere that have been tolerated by markets for so long. But I wonder if the hidden losses on bank and insurance company balance sheets have changed the dynamic.

So where do yields end up? With 4.50% now broken, the talk will turn to 5%. That's a tough one because the only way I can see it happening is a further rise in commodity prices and upside surprise in jobs/inflation that's coupled with incredible resilience in the economy. What's the chance of that? I'd peg it at 20% but it's also coming at a time when there is clearly a slowdown in the rest of the developed world (what doesn't have the benefit of 30-year fixed mortgages). That dynamic is likely to lead to more USD strength but may cap US yields as other central banks contemplate cuts.

Even with that, I can't rule out an overshoot and there's even some talk of tax-loss selling in Treasuries as year end approaches. Ahead of that, we should be seeing some quarter end buying of bonds (ie lower yields) on rebalancing. However so far, there's no sign those flows are meaningful and that has to be worrisome for the bond bulls.

On net, there is simply no reason to fight this move higher in yields. At some point there will be an incredible opportunity to buy bonds and I wouldn't criticize anyone for taking 4.5% now but I don't yet see a catalyst for a reversal.