How high can it go? Analysing the 10-year yield’s rapid rise

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How high can it go? Analysing the 10-year yield’s rapid rise

Over the past week, the global financial landscape witnessed noteworthy fluctuations, primarily marked by the 10-year Treasury yield nearing a significant 5% level—a phenomenon not seen since 2007. In conjunction with potential interest rate hikes hinted at by the Federal Reserve, this dynamic has caused palpable tension in both the equity and bond markets.

Here is a deeper dive into the key events and their implications.

The Oil Conundrum

Supply Threats: Oil markets remain on tenterhooks due to potential disruptions from the Middle East. This geopolitical uncertainty nudged Brent futures past the $93 mark, primarily after missiles targeted Israel.

Shifting Focus: Demand Plateau: The International Energy Agency (IEA) is poised to release its annual ’World Oil Outlook’. A sneak peek suggests the agency believes oil consumption might hit its zenith before this decade concludes. This starkly contrasts with OPEC’s view, which sees oil demand surging until mid-century. With environmental concerns weighing heavily, the exact timeline and peak level of oil use will be keenly watched in the IEA’s upcoming release.

Bond Yields: The Climbing Game

The Big Picture: The 10-year Treasury yield has been the talk of the town as it edges closer to a whopping 5%, a level we haven’t witnessed since 2007. Meanwhile, its 2-year counterpart is hot on its heels, nearing 5.15%.

Causes for the Rise: The combination of a resilient U.S. economy, ballooning fiscal deficits, and international interest rate manoeuvres has fuelled the uptick.

• The U.S. economy is holding firm, potentially steering Treasury yields upward.

• An imbalance between the supply and demand for U.S. Treasury bills and notes, exacerbated by a contracting demand from key foreign players like China

• Global interest rates, particularly from the major economies, influence the 10-year yield trajectory.

Equities and Other Instruments

The Equities Slide: Amidst the yield drama, the S&P 500 receded by over 2%, rattled by higher rates and geopolitical tremors. The unfolding conflict between Israel and Hamas further casts shadows on stocks.

Gold Shines Through: While equities felt the heat, gold continued its ascent, benefiting from the current market dynamics.

The Federal Reserve’s Play: Recent hints from Jerome Powell suggest the central bank could keep rates stable in the near term. Yet another rate hike is not off the table, contingent upon robust economic growth.

Sectors in Focus

European Oil Stocks: Geopolitical tensions in the Middle East are elevating, pushing crude prices up. This scenario places European oil stocks in the spotlight, as they may experience activity due to a potential second consecutive weekly gain in crude prices.

Carmakers: Despite the rising interest rates, which generally make car acquisitions costlier, European auto sales sustained double-digit growth in September. This trend suggests carmakers are a sector to watch closely.

Notes from the Sell-Side

L’Oreal Performance: L’Oreal’s shares listed in the U.S. saw a 2% decline. This dip is attributed to an unforeseen drop in comparable sales in North Asia. However, the fall was somewhat offset by better-than-anticipated comparable sales figures from North America and Europe.

Sika’s Situation: Sika posted robust results. However, as indicated by Baader, these cheerful figures might be overshadowed by looming antitrust investigations targeting the construction chemical sector.

Final Thoughts

Yields’ Destination: Historical data points to an average 10-year yield of around 4.5% from 1990–2019. Given the current macroeconomic indicators, the yield might eventually stabilise between 3.5% and 4.5%, in our view.

Portfolio Implications: This new yield landscape could recalibrate equity portfolios, with a more even balance between growth and value stocks. Additionally, the rising yields might make bonds a more attractive component of investment portfolios.

Source: Data and insights derived from diverse financial sources, including Bloomberg Intelligence and market observations.

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