Al-Watani: Sharp rise in yields on long-term U.S. Treasury bonds

The National Bank of Kuwait’s weekly report on money markets stated that global markets this week witnessed a widening gap between the signals sent by the US Federal Reserve and the expectations reflected in market pricing. The minutes of the Federal Open Market Committee’s July meeting, released last week, revealed a more hawkish stance than the announced decision suggested, with three members opposing the decision and favoring an immediate interest rate hike, while the majority of members believed that continuing to tighten monetary policy (raising the interest rate) might be necessary if inflationary pressures do not subside.

Despite this, the dollar continued its decline to its lowest levels in several months, heading toward recording a weekly loss, amid weaker-than-expected labor market data following the meeting, alongside the US Treasury’s move to double its program for repurchasing long-term bonds. This limited expectations for an interest rate hike in September.

In Europe, economic activity data clearly exceeded expectations. The composite Purchasing Managers’ Index (PMI) for the eurozone rose to its highest level in nine months, supported by the strongest recovery in the industrial sector in over four years, along with strong performance in the German economy, while consumer inflation expectations declined.

In the United Kingdom, economic indicators presented a more complex mix. Private sector activity performed better than expected, while the overall inflation rate accelerated, influenced by the energy price cap. Meanwhile, retail sales recorded their first monthly decline since April.

In the Asia-Pacific region, inflation in Japan continued to rise as energy subsidies were reduced, keeping expectations for a Bank of Japan interest rate hike in September intact, while economic activity in Australia slowed down. Against this backdrop, Brent crude continued its gains, surpassing the $93 per barrel level, with no signs of easing tensions surrounding the Strait of Hormuz. Energy prices remain the common denominator influencing inflation prospects across major economies.

At the beginning of the week, yields on long-term US Treasury bonds rose sharply, with the 30-year bond yield climbing to 5.32%, marking its highest level since 2007. This prompted the US Treasury to intervene, announcing that it would at least double the volume of bond repurchase operations aimed at supporting liquidity, which include securities with maturities ranging from 10 to 30 years. This move followed the sharp rise in long-term bond yields and the concerns it raised regarding market liquidity and stability.

This step provided a degree of temporary relief before bond yields resumed their upward trajectory later in the week. It also contributed to reinforcing the weaker tone of the dollar, as investors assessed the implications of these developments for the Federal Reserve’s monetary policy path.

Participants in the FOMC meeting described labor market conditions as stable, with the unemployment rate remaining close to most estimates of its long-term level. Job growth broadened to include sectors beyond healthcare and social services, while layoff rates and initial jobless claims remained at low levels.

Participants noted that economic activity continues to expand at a strong pace, supported by corporate investments related to artificial intelligence and the continued resilience of consumer spending. However, some members pointed to increasing pressures on low- and middle-income households as disposable income erodes due to inflation. Data released since the meeting, however, proved weaker. The July jobs report showed poor performance, alongside significant downward revisions to previous months’ data. This pushed market expectations for the September meeting toward keeping interest rates unchanged, ahead of the release of the core Personal Consumption Expenditures (PCE) price index on August 26.