Morning Bid: Bonds boil

By Mike Dolan

Sept 2 (Reuters) – A new wave of strikes in the Iran war this week has seen energy prices surge once again, adding fuel to the selloff across world bond markets as investors brace for a series of central bank interest rate rises this month.

With rising government borrowing costs concentrated on the economically sensitive 10-year benchmark rates, rising yields have ripped across global stock markets, too.

U.S. 10-year Treasury yields hit their highest since 2023 on Wednesday as world crude and natural gas prices climbed. At 4.8%, the 10-year yield is fast approaching a 5% level seen as a major challenge to equities for mixed asset portfolio managers.

But with interest rate rises now odds-on at the Federal Reserve, European Central Bank, and Bank of Japan this month, there’s a nervous couple of weeks ahead.

Centrist Fed board member Michael Barr indicated on Tuesday that he felt a rate rise in September may now be necessary, while Fed Chair Kevin Warsh laid out the case for a hike last week.

New Zealand’s Reserve Bank became the first central bank to pull the trigger this month with its second consecutive rate rise on Wednesday. Even though another hike there is still in the mix, more dovish noises about what happens after that knocked back the kiwi dollar.

The fresh jump in energy prices, meantime, is adding to the budgetary and political pressures for many governments as the winter season approaches with no sign of an end to the Iran conflict.

Britain and France have critical annual budgets coming up, Germany has three important state elections in September, and the U.S. midterm elections are just two months away now.

Elsewhere, attention will now drift to the U.S. labor market data this week, although that’s considered to be a secondary influence on the Fed at the moment, behind the issue of above-target inflation.

And there were more signs of the AI boom extending on Tuesday, as earnings from Dell and Palo Alto Networks overnight beat estimates. Broadcom is due up later today.

Chart of the day

As European countries head into the annual government budget-setting process and winter approaches, the renewed spike in energy prices will be jarring. Rising oil and gas prices have already inflamed sovereign borrowing costs around the continent and the world.

Crude oil prices are stalking their highest level since July, but Europe’s reliance on imported natural gas means the surge in those benchmark prices to their highest point since 2023 is another big aggravation.

Today’s events to watch

• U.S. August ADP private-sector payrolls (8:15 a.m. EDT), July manufacturers’ new orders (10 a.m. EDT)

• Fed issues Beige Book (2 p.m. EDT)

• U.S. corporate earnings: Broadcom

• Bank of Canada interest rate decision

Before you go, check out my latest column on the “real” deal behind rising bond yields.

And listen to the latest episode of the Morning Bid daily podcast, where we discuss the bond market ructions, New Zealand’s interest rate decision, and more.

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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

(By Mike Dolan)