Rising Treasury Yields Linked to Changing Fed Outlook, Not Deficit — Market Talk

1006 ET - The Treasury selloff may have less to do with the U.S. fiscal deficit than analysts suppose. Apollo's Torsten Slok says in a note that the New York Fed's measure of how much yield investors demand to hold 10-year government debt, or term premium, "has moved sideways over the past 12 months," indicating that "there has been no deterioration over the past year in how the market prices US fiscal sustainability or Fed credibility." Slok adds that the U.S. term premium is lower than Japan's or Germany's. He concludes that, with the Fed outlook changing from expected cuts to potential hikes "it is not surprising that long rates are higher." ([email protected]; @ptrevisani)0955 ET - Stocks in Qatar lead major exchanges in the Gulf lower as renewed U.S.-Iran escalation weakens risk appetite and higher oil prices revive inflation and rate concerns. Geopolitical risk has moved back to the center of markets, with Brent's surge feeding quickly into bond yields and weighing on equities, Emirates NBD says. The Dubai-based bank's senior economist Daniel Richards says any perceived threat to Gulf shipping lanes is also likely to keep an oil-risk premium embedded in crude prices. Qatar's QE Index falls 1.0%, Saudi Arabia's Tadawul All Share Index drops 0.8% and Abu Dhabi's benchmark index declines 0.7%. The Dubai Financial Market General Index loses 0.3%. ([email protected])0927 ET - Amid the global bond markets rout, Treasury floating rate notes could be "the vehicle of choice to fill ultra-short/short duration allocations" for fixed-income investors, WisdomTree's Kevin Flanagan says in an email. In the latest monthly auction last week, two-year FRNs had a bid-to-cover ratio of 3.14, indicating high demand. The metric has been close to that level for months. Moreover, two thirds of nearly $30 billion in FRNs sold last week were taken by indirect bidders, a group that includes foreign investors. The securities "have been witnessing increased demand as the outlook for Fed policy has shifted from rate cuts to potential rate hikes," Flanagan says. ([email protected]; @ptrevisani)0925 ET - Interest rates are currently in a good spot to balance low unemployment and stable prices, New York Federal Reserve president John Williams says on CNBC. Williams supported the Fed's decision at the last meeting not to raise rates. Real interest rates are rising from heavy investment in AI infrastructure, which is bleeding into other sectors like mortgages in a detrimental way, he says. But the Fed's role is to keep collecting data, push past market signals and focus on it main goals of maximum employment and price stability, Williams says. As for potential rate increases going forward, Williams says "we have to wait and see." ([email protected])0911 ET - Bitcoin is down 0.6% to $76,987, under pressure after Fed Chair Warsh's recent speech that pushed overall market sentiment toward a quarter-point rate hike later this month. Alternative store-of-value assets like gold and bitcoin have been hit by higher Treasury yields, which come at a time known to some in the cryptocurrency space as "Rektember". The month of September is often considered by some as a negative month for bitcoin, although September prices in recent years have been mostly rangebound, according to data from CoinMarketCap. Ethereum falls 1.4% to $2,387, XRP is down 1.7% to $1.33, and solana is off 1.8% to $98.26. ([email protected])0902 ET - New York Federal Reserve president John Williams says long-term bond yields are driven by the broad strength of the U.S. economy and heavy capital spending on AI. A glut of investment demand for data centers and tech infrastructure is increasing funding costs broadly, Williams tells CNBC. "It's not really about financial conditions affecting the economy, its about the economy affecting financial conditions," he says. Core inflation may be over target, but that excess is driven by high energy prices tied to conflict in the Middle East and tariffs, Williams says. ([email protected])0856 ET - Eurozone core inflation is set to move sideways in the next few months, even as higher oil-and-gas prices push the headline rate higher, Morgan Stanley economists say in a note. Goods inflation is likely to strengthen further on the back of some transmission from higher energy costs, they say. However, broadly stable services inflation and contained wage growth should keep core inflation contained. "Still, oil and natural-gas prices remain elevated and the economy is resilient. Both factors are likely to support views that the transmission from energy to core could materialize more forcefully," the economists say. That keeps the European Central Bank on course to raise interest rates next week, they say.([email protected])0847 ET - The cost of insuring euro credit against default rises as risk appetite declines amid increasing sovereign bond yields. High sovereign bond yields and oil prices are contributing to weak risk sentiment, IG analysts say in a note. The iTraxx Europe Crossover index of euro high-yield credit default swaps rises 1 basis point to 252bps, S&P Global Market Intelligence data show. ([email protected])0845 ET - Treasury yields decline from overnight highs, mimicking oil moves as the Middle East conflict gives no signs of cooling. Crude is down less than 1%, hovering around $90. ADP says U.S. private-sector employers created 38,000 jobs in August, missing WSJ consensus of 47,000 and slowing from July's upwardly revised 46,000. New York Fed's Williams says on CNBC that it is important to bring inflation down to 2%, but stops short of committing to a September hike. The 10-year yield falls to 4.778% after rising as high as 4.815%, the highest in nearly three years, overnight. The two-year is at 4.377%, also off early highs.([email protected]; @ptrevisani)0813 ET - A more stable job outlook is keeping U.S. consumers afloat for the time being, TD Securities analysts say. Consumers are still feeling strapped for cash due to high prices, but their position is less dire than last year, the analysts say. That's because private payrolls are strong and the unemployment rate has come back down from hitting 4.5% in November 2025, the analysts say. Youth labor market conditions, which were a source of concern last year, have improved in 2026, they say. ([email protected])0727 ET - While an interest-rate hike by the European Central Bank next week seems likely, further tightening could pose growing risks to the eurozone economy, ING's Carsten Brzeski says in a note. The risk is heightened by surging bond yields, which are tightening financing conditions and putting pressure on public finances, he says. Higher bond yields can have an even greater impact on growth and inflation than equivalent policy-rate increases, Brzeski notes. With inflation largely driven by elevated energy prices rather than overheating demand, additional hikes would do little to address the underlying supply shock while increasing the danger of unnecessarily restrictive policy. "It's difficult to envisage the ECB being willing to risk a recession to tackle what is still a textbook supply-side shock." ([email protected])0722 ET - The continued climb in gas prices amid escalating U.S.-Iran tensions and the increase in eurozone inflation to 3.3% in August cement a September rate hike from the European Central Bank, Ebury's Matthew Ryan says. Even so, a passthrough from the energy spike to underlying inflation was still conspicuously absent in August's data, he says. Core inflation declined to 2.4% from 2.5% in July, returning to its February level before the start of the Iran war. "While a September hike looks all but guaranteed, further tightening into restrictive territory beyond that is far from certain." That could keep a lid on further appreciation of the euro against the dollar, particularly given how aggressively markets are currently pricing in additional hikes, Ryan says. ([email protected])