US Treasury and eurozone government bond yields fell in European trading on Tuesday as oil prices eased and AI stocks pulled back, giving investors some relief after last week's sharp rise in bond yields. According to The Wall Street Journal, the 10-year US Treasury yield fell 5.5 basis points to 5.189%, while the 30-year Treasury yield dropped 5.1 basis points to 5.547%. Both yields are now well below the 24-year highs they reached last week, when the 10-year yield touched 5.365%, and the 30-year yield climbed to 5.733%. In Europe, Germany's 10-year government bond yield fell 3.7 basis points to 3.437%, while France's 10-year government bond yield dropped 5 basis points to 4.850%, showing a slightly bigger decline than its German counterpart. US Treasury markets reopened on Tuesday after remaining closed on Monday for the Columbus Day holiday.
The decline in borrowing costs came after oil prices fell sharply earlier in the day, with Brent crude futures falling 0.9% to settle at $105.69 per barrel, while US West Texas Intermediate (WTI) crude futures rose 0.43% to settle at $94.14 per barrel. Investors were also watching the possibility of more Russian diesel entering global energy markets following the US-brokered so-called 'energy ceasefire' between Russia and Ukraine. Changes in oil prices are closely watched by bond investors because higher energy costs can push up inflation, making it harder for central banks to cut interest rates. A fall in oil prices can ease some of those concerns, as noted by The Wall Street Journal.
Investors are now waiting for US consumer price inflation data for September, due on Wednesday, which is expected to offer fresh clues about the Federal Reserve's next interest-rate decision, scheduled for October 28. According to LSEG, markets currently see only a 19% chance of the Fed raising interest rates at its October meeting, though traders have fully priced in three rate hikes over the next 12 months. September's annual inflation data is expected to show consumer prices rising 3.7% from a year earlier, which would be higher than the 3.4% increase recorded in August. Core inflation, which excludes food and energy prices, is expected to rise to 2.5% in September from 2.4% in August on an annual basis. A Wall Street Journal poll of analysts expects headline consumer price inflation to rise 3.6% in September from a year earlier, up from 3.4% in August, which would reinforce the view that the summer's brief disinflation trend has faded and price pressures are reaccelerating.
Analysts are also seeing early signs that the recent selloff in US government bonds could begin to slow. According to The Wall Street Journal, citing DZ Bank analysts, estimates that the term premium on the 10-year US Treasury yield stands at 91 basis points. This is in line with the average level since the early 1990s but is also the highest since 2014. The term premium is the extra return investors demand for holding longer-term bonds instead of shorter-term debt, with investors generally seeking this additional return because longer-term bonds carry greater uncertainty, including the risk of changes in inflation and interest rates. DZ Bank analysts said the high term premium, along with the possibility that markets will scale back their expectations of further interest-rate increases, limits the scope for another sharp rise in bond yields.
The International Monetary Fund has issued a stark warning that the Middle East war represents the biggest risk to global economic growth, with the institution's chief economist Silvana Tenreyro telling Reuters that "the global economy has been resilient, but that resilience is reaching its limits." According to the IMF, global growth is expected to reach 3.4% next year, but the organization emphasizes that "we need to move from just coping to rebuilding" and "restore fiscal space and rebuild supply-side resilience." The Middle East war has fueled inflation through soaring prices for energy commodities that are spilling over the broader economy, but IMF deputy research director Petya Koeva Brooks noted that government action to cushion the blow has worked to curb the risks of major pain, helped by demand destruction due to the higher prices. The Iran-backed Houthi militia launched an attack on Saudi Arabia's capital airport on Sunday, marking a dangerous escalation in regional tensions that threatens to derail the summer's brief disinflation trend.
