24 October 2023 — The Return of 5%: When Bonds Reclaimed Control of Markets

Last week, the yield on the 10-year U.S. Treasury briefly touched 5% — a level not seen since 2007.¹ Why does a number most savers never look at matter? Because the 10-year yield is the price of money for the entire world. It sets U.S. mortgage rates. It is the yardstick against which every other asset — shares, property, gold — gets measured. And it has moved a full percentage point higher in four months, an earthquake in a market that trades in hundredths.

The rise is awkward because inflation is falling and the Fed says it is probably finished tightening. Three forces are at work. The U.S. economy refuses to roll over: 336,000 new jobs were added in September, almost double expectations.² The U.S. government is issuing bonds at an extraordinary pace to cover a $1.7 trillion deficit. And Powell said in a New York speech last Thursday that the economy’s strength “might warrant tighter financial conditions”³ — which investors heard as the Fed being happy to see yields rise.

Alongside this runs a more terrible story. On 7 October, Hamas launched a surprise attack on Israel, killing roughly 1,400 people. Israel has declared war. Oil briefly jumped from $85 to above $93 per barrel before settling back as it became clear the conflict was not spreading to other oil producers.⁴ Interestingly, the conflict is not the main driver of bond yields — on days when Middle East news is worse, yields actually fall as investors seek safety. The autumn rout is about U.S. growth and fiscal concerns, not geopolitics.

Higher yields are starting to hurt. U.S. 30-year fixed mortgage rates have climbed above 8% for the first time since 2000.⁵ The S&P 500 has fallen 10% from its late-July peak. Gold has risen above $2,000 per ounce. Prominent investors are weighing in. Bill Ackman announced yesterday he has closed his bet against 30-year Treasuries — his post on X helped push yields back below 4.85% within hours.⁶ Jamie Dimon of JPMorgan warned on 13 October the world “may be facing the most dangerous time the world has seen in decades.”⁷ Ray Dalio, in Singapore yesterday, said rates are “probably too high for the indebted world but too low for the inflation risks.”⁸

Three reminders. Bonds, not shares, are the true centre of gravity of global finance — when they move, everything moves. Bad economic news is sometimes good for your portfolio and good news is sometimes bad: shares have fallen largely because the U.S. economy is too strong. And government deficits matter more than most realise: when a government issues more debt than buyers will absorb, yields must rise to attract them.