What happens when bond markets become the main driver of investor sentiment? In this edition of the InvestNow Market Wrap-Up, Alistair Dring, Assistant Portfolio Manager, Mint Diversified Funds at Mint Asset Management, examines the events that shaped July and the signals emerging from global markets.
If you watched only one number in July, it should have been that of the long-dated bond. Government bond yields are where the discount rate gets set, and the present value of every other asset flows from there. The US 30-year Treasury yield is an anchor for long-term borrowing costs worldwide and in July, it rose from 4.95% to 5.27%, the highest level since 2007. Where the US Treasury goes, the rest of the world tends to follow, so long-dated yields lifted alongside it across most other developed markets. While the back-end did some heavy yield lifting, the front end also experienced a pick-up.
The primary factor for the repricing of yields is interesting. First, and not unexpectedly, given the fitful nature of the conflict in Iran and its impact on the oil price, inflation expectations drifted higher. In addition, the US Federal Reserve held rates for a fifth consecutive meeting on 29 July, at a time when its own June projections showed half the committee leaning toward a further hike this year. Markets read the hold not as confidence, but as a central bank content to wait while inflation stayed above target. This prompted markets to be concerned about intransigent inflation getting moored in expectations.
Another reason for the pick-up in bond yields is a little more tenuous. Many pundits are pointing to increased competition from AI-related issuers competing for the same buyers. Governments heavy debt issuance now has company. The largest AI and cloud companies have raised roughly US$225 billion in bonds so far this year to fund data-centre construction, a pace that puts them on track for around US$400 billion. Investor appetite is visibly thinning: orders for those deals covered nearly five times the amount on offer in February, and less than twice by July. Many argue this is not a reason for higher yields and that it is difficult to squeeze out government issuers, but more bonds chasing the same pool of savings does not make yields go lower.
And finally, the sound of silence. All of this was not helped by the Fed who stopped telling markets what it was thinking. New chair Kevin Warsh has abolished forward guidance outright – the July policy statement ran to 132 words, against 341 in April. Whatever the long-run merits of that change, its immediate effect is that investors must price the future themselves, and uncertainty about the path of short-term rates gets paid for at the long end of the curve.
