Why are US Bond Yields Surging?

Thoughts of the Day

The 10-year US bond yield hit a 16-year high at 4.55%. Last week, FED Chair Powell said that he doesn’t think that US bond yields are rising because of inflation fears, but rather because of the strong economy and higher bond supply.

Also, reduced Chinese Treasury holdings is a reason for weak bond market .

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Day Ahead

Nothing noteworthy on the horizon today.

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What Happened Yesterday

Market Movements as of New York Close 25 Sep 23
  • European Central Bank (ECB) President Christine Lagarde said that despite progress on inflation it is seen as too high for too long as the labour market has so far remained resilient. She stuck to the same message that the ECB “will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary,”
  • The US Treasury Yield curve inversion narrowed to 0.54% as the US bond curve steepened with the 10 year bond yield surging to 4.55%, the highest levels since 2007.The 2-year bond yield was relatively unchanged at 5.09%. The bond market remains under pressure as the Fed’s message of “higher interest rates for longer” from last week continues to spook bond traders. 
  • The US stock futures fell prior to the cash open as the surge in US bond yields and weak European stocks weighed on risk sentiment. However, energy stocks helped the S&P 500 hold technical support (4300) and the market climbed into positive territory as the day progressed. The S&P500 closed +0.40% higher (low -0.40%), the Dow rose +0.13% (low -0.54%) while the Nasdaq gained 0.46% (low -0.58%).
  • Amazon’s (AMZN +1.67%) $4 billion investment into AI firm Anthropic helped fuel optimism that the AI sector will continue to boom.
  • The crypto market also range-bound with Bitcoin rising a mere 0.1% and Ether gaining 0.44%.
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Headlines & Market Impact

US thermal coal exports jump to 5-year highs on Asian demand: Maguire

Notable Snippet: United States thermal coal exports hit their highest levels since 2018 during the first eight months of 2023, climbing 20% from the same period in 2022 thanks to strong demand from key consumers including China, India and South Korea.

In percentage terms, the increase in U.S. exports was the largest among all major thermal coal exporters, surpassing even the 15.7% expansion seen from top coal exporter Indonesia.

Asia accounted for 48% of total U.S. exports, or around 10.6 million tonnes, with 7 million tonnes going to India, 1.3 million tonnes to Japan, 1.1 million tonnes to China and 600,000 tonnes to South Korea.

Over the near term, the wide range of coal importing markets bodes well for U.S. coal exporters, and outbound shipments should climb again over the winter months as long as U.S. prices remain competitive to other suppliers.


But over the longer term, U.S. coal exporters may start to struggle to profitably find willing buyers for their production, as a growing number of power generation companies have pledged to boost renewable energy supplies and will cut back on coal imports.

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Amazon to invest up to $4 billion in Anthropic, a rival to ChatGPT developer OpenAI

Notable Snippet: E-commerce giant Amazon on Monday said it will invest up to $4 billion in artificial intelligence firm Anthropic and take a minority ownership position in the company.

The move underscores Amazon’s aggressive AI push as it looks to keep pace with rivals such as Microsoft and Alphabet’s Google. Anthropic was founded roughly two years ago by former OpenAI research executives and recently debuted its new AI chatbot called Claude 2.

The two firms on Monday said that they are forming a strategic collaboration to advance generative AI, with the startup selecting Amazon Web Services as its primary cloud provider.

Amazon is looking to position itself as the one-stop shop for AI. The e-commerce giant designs its own chips for training huge AI models. Through Amazon Bedrock customers can also design their own generative AI applications using existing models, which are all run on the Amazon cloud. The company sells its own AI applications too.

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Digital Euro at Least 2 Years Away, ECB’s Lagarde Says

Notable Snippet: A digital euro is at least two years away, the European Central Bank’s president told lawmakers on Monday as she sought to address privacy fears arising from the central bank digital currency (CBDC).

The ECB is due to take major decisions over whether to press ahead with preparations for the CBDC in the coming weeks, but many members of the European Parliament – who would need to sign off on the plans – appear skeptical.

“It’s not until later in October that the [ECB] Governing Council will decide whether we can move ahead with more piloting of the project,” ECB President Christine Lagarde told lawmakers on the EU Parliament’s Economic and Monetary Affairs Committee. “The pilot will probably take us another two years, at least, before it’s the final say.”

If “we can address all the conspiracy theories that abound about this – as if Big Brother was going to suddenly determine what you buy, when you buy it and how restricted it should be – then I think it would be characterized as a success,” Lagarde said, adding that the digital euro will need to offer privacy without full anonymity, and be user-friendly, free and universal.

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Best,
Phan Vee Leung
CIO & Founder, TrackRecord