Despite global bond yields reaching their highest level in a month following renewed Middle East tensions and Federal Reserve concerns, UBS CIO House View maintains that bond yields should fall as the year progresses. The investment bank views the current elevated yields as an opportunity for investors to secure attractive portfolio income, with the 10-year US Treasury yield trading near 4.57% and the 10-year German Bund yield around 3.07% at the time of writing. According to UBS, while yield volatility may remain elevated in the near term, the recent sell-off in global bond markets presents opportunities for investors to lock in appealing yields. The firm favors short- to intermediate-maturity quality bonds denominated in US dollars and British pounds, and sees value in select European bonds with longer maturities.
US Treasury yields retreated on Thursday as investors purchased bonds following this week's decline in prices, though gains remained limited amid ongoing concerns over military tensions. The benchmark 10-year Treasury yield fell 1.6 basis points to 4.551% in late morning trading, down from the seven-week high reached on Wednesday, while the 30-year bond yield held steady at 5.065% after climbing to a seven-week peak the previous day. The 2-year Treasury note yield dropped 2 basis points to 4.18%, having touched its highest level in two weeks on Tuesday. This retreat represents a reversal from the previous session's surge that saw yields breach key levels of 4.5% and 5.0% respectively. According to Yahoo Finance, the 10-year Treasury yield is currently trading at 4.5390%, down 0.66% from the previous session, while the 30-year Treasury yield stands at 5.05%, declining 0.24%.
Minutes from the Federal Open Market Committee's June meeting have intensified investor worries over tighter central bank policies, with "a few" participants saying there was a case for raising rates last month and that "some policy firming would likely be warranted" if inflation remains elevated. Market attention has intensified around the Iran conflict after Iranian armed forces launched attacks on US military infrastructure in Gulf states on Thursday. The strikes followed US military operations targeting Iran's southern coastal and eastern provinces, adding pressure to a three-week-old ceasefire agreement. Part of the yield surge may be attributed to renewed tensions in the Middle East, after the US struck Iran and reinstated sanctions on Iranian oil, as reported by Fixed Income Weekly. However, US crude oil futures fell 1.7% to $72.33 per barrel, providing some relief to Treasury markets from the earlier spike in oil prices that had reached $72.33 a barrel during the height of the crisis.
Weekly jobless claims data supported expectations that the Federal Reserve will maintain its current interest rate policy for several upcoming meetings, as the labor market shows signs of stabilization following a sharp slowdown in job growth in June. Initial jobless claims fell by 2,000 to a seasonally adjusted 215,000 in the week ended July 4, below the 218,000 forecast in a Reuters poll of economists, suggesting the labour market remains relatively stable. Following the data, interest rate futures reflected a 26% probability of a Federal Reserve rate hike later this month, down from roughly 31% on Wednesday evening, according to CME Group's FedWatch tool. The 2-year Treasury yield, which reflects market expectations for Federal Reserve decisions, dropped 2 basis points to 4.18%, indicating growing confidence in the Fed's current stance amid the current policy uncertainty.
Demand for longer-dated government debt remained robust as the U.S. Treasury sold $22 billion of 30-year bonds at a yield of 5.058%, below prevailing market expectations, indicating investors were willing to accept lower yields, according to Reuters. The auction followed similarly strong demand at recent sales of three-year and 10-year Treasury notes. Although 30-year Treasury yields remain around 5 basis points higher than at the previous auction in June, the latest sale underscored continued investor appetite for long-term U.S. government debt despite recent market volatility. However, investors may also be cautious ahead of the upcoming 10-year and 30-year UST auctions, which could influence future market direction.
A breakdown of the yield move suggests that the rise in US yields is being driven less by inflation concerns and more by an increase in real yields, as noted by Fixed Income Weekly. Market participants may become more wary of sentiment if both real and nominal yields — each already elevated by recent standards — continue to move higher. Investors increasingly expect the Fed to remain on hold in the near term, with the possibility of rate cuts later this year if inflation continues to moderate and economic growth slows. Separate housing data also pointed to moderating economic activity, with existing home sales falling 2.4% last month to a seasonally adjusted annual rate of 4.09 million units, missing economists' expectations in a Reuters poll for an increase to 4.20 million units. Despite current volatility, UBS maintains that the recent sell-off in global bond markets presents opportunities for investors to lock in attractive yields.
