— This is the script of CNBC's news report for China's CCTV on October 06, 2023.
One major focus in the markets this week has been the yield on the 10-year U.S. Treasury bonds, which has climbed to its highest level in over a decade.
On Thursday, the 10-year treasury yield saw a slight decline to 4.72%, but it still remains at a high level not seen since 2007. Analysts said that the 10-year treasury yield is a key interest rate benchmark, and its rise can lead to an increase in borrowing costs across various sectors. This includes loans and bonds for everyone from consumers to businesses to the government.
For consumers, their housing and car loans will be affected. For companies that finance through issuing bonds, they will face significantly higher borrowing costs. For individuals and businesses with variable-rate loans set to mature shortly, they will feel the impact of rising interest rates.
Bond yields and prices move inversely. Hence, the rise in yields also puts pressure on regional banks that hold treasury bonds, as the value of their bond holdings decreases. This was one of the significant factors behind the collapse of Silicon Valley Bank in March this year.
Furthermore, as bond yields increase, they become more attractive to investors, and bonds carry less risk compared to stocks. Therefore, the rising bond yields could also have an impact on the stock market. Currently, investors may shift from stocks to bonds when making asset allocations.
Kevin Nicholson
RiverFront Investment Group CIO of global fixed income
"With interest rates rising higher is that I think that you're going to see fewer, fewer people allocating to equities."
Analysts expect that the sell-off in the bond market is likely to continue. There are multiple factors behind this, including expectations regarding inflation, economic growth, expectations of the Fed's rate hikes, and the ongoing reduction of bond holdings by the Fed as part of its quantitative tightening process, which increases the supply of bonds and affects the bond market's performance.
Bill Gross
Co-founder of PIMCO
"Well, I think we can go to five, Brian. You know, the market certainly is oversold at the moment in anticipation of treasury supplies, in anticipation of higher for longer in terms of the Fed and the Fed's own quantitative tightening program."
Regarding expectations for the Fed's monetary policy, the market is currently closely watching the September non-farm Jobs report, which is scheduled to be released this Friday. This is the economic data that the Fed closely monitors. The market expects an addition of approximately 170,000 jobs in September. Average hourly wages are expected to increase by 4.3% year-on-year, and the unemployment rate is expected to drop to 3.7%.
Both Goldman and Citi are forecasting higher numbers, with both expecting new jobs to exceed 200,000. An overheated labor market is not good news for the Fed, as it means the battle against inflation is not yet over. Analysts generally believe that if the data surpasses expectations, it could increase the likelihood of another rate hike in November.
According to the CM's FedWatch, the market currently places a relatively low probability, around 22%, on a rate hike in November. Mary Daly, the San Francisco Fed Chair, has also stated that the recent tightening in the bond market is essentially equivalent to a rate hike, which has a cooling effect on the economy. Therefore, she believes there is no need for the Federal Reserve to further tighten in November. Tonight, the employment data will show us if the labor market cools down.