The recent rise in US bond yields is emerging as a new source of investor anxiety after the 10-Year Treasury rose to a level not seen in almost two decades.
A Bank of America fund manager survey on Tuesday said 33 per cent of respondents saw a “disorderly rise in bond yields” as the biggest market risk, replacing artificial intelligence.
The survey was released a day after the yield on the 10-year Treasury passed 5 per cent. The 10-year yield rose to as high as 5.041 per cent earlier in the day – its highest since July 2007 – pushing up borrowing costs for consumers and companies.
The rise in bond yields dragged down Wall Street's main indexes, with the Dow Jones Industrial Average suffering a loss of 328 points, or 0.63 per cent.
Analysts have attributed the recent increase in bond yields to rising oil prices and inflation fears stemming from the Iran war, concerns about the US fiscal direction and spending by AI companies.
Investors are now increasingly looking to the Federal Reserve to clamp down on inflation. Traders have all but locked in that the US Fed will raise interest rates by 25 basis points on Wednesday, with the UAE Central Bank likely to follow because of the dirham’s peg to the dollar.
The rise in US Treasury yields come as some energy exporters in the Gulf lose out on revenue from the Iran war, which could make it more expensive to borrow. For countries with lower revenue and higher spending needs, government reserve funds and possibly sovereign wealth funds could be called on to assist with projects, said Rachel Ziemba, founder of geopolitical risk firm Ziemba Insights.
“And so those issues, more so than where US rates are, are arguably more important,” she said.
Ms Ziemba also said the region has been investing more in US equities and private equity, rather than in Treasury bonds and similar dynamics.
“And I think that trend is likely to continue,” she said.
Treasury Secretary Scott Bessent blamed the recent rise in bond yields on “global issues”, with the rise in US Treasury yields occurring alongside others across advanced economies as part of a broader global bond rout. Mr Bessent acknowledged the recent increase also reflected the “need to address the [US] deficit”, which recently passed $40 trillion.
Mr Bessent told politicians during his testimony on Capitol Hill that the buyback programme was a success, repeating his claim the US bond market has been the best-performing in the developed world since President Donald Trump began his second term.
The Treasury Department last week announced it was seeking to buy back $6 billion of government debt, triple the size of its normal operations, in an effort to calm the market. The department previously announced it would double the size of the programme.
“There is a counter-factual of what would it have done – and we then proceeded to have the two most successful Treasury auctions that we've had in 20 years,” he said.
Peter Andersen, founder of Andersen Capital Management, said he believes low interest rates over the past 10 years have warped perceptions about the current Treasury levels.
“If you look across history, a 10-year 5 per cent Treasury is not unusual, he said. “I think people need to be recalibrated.”
