After the US Treasury sell-off intensified on Thursday, pushing 10-year yields to 5.20 per cent and 30 year yields to 5.48 per cent reaching record highs, wealth managers react.

The sell-off in US Treasuries has been intensifying: the 10-year yield has risen a further 8.5 basis points to close at 5.20 per cent, its highest level since 2007. The 30-year yield reached a post-2004 high of 5.48 per cent.

“While a rebound in oil prices likely did not help matters, the increase in Treasury yields is being driven by real yields, not inflation expectations,” Jon Butcher, senior US economist at Aberdeen Investments said. “The breakeven on the two-year has barely inched up this week and remains well below the highs from earlier in the year. Instead, markets seem to be responding to weak Treasury auction demand and increased signals of an accelerating US economy with expectations of a tighter Fed policy path.” (The bond break-even point is the yield at which an investor neither gains nor loses money when holding a bond until maturity.)

“This week’s seven-year auction saw its weakest bid-to-cover ratio in a year, and indirect demand also fell back. Demand has also been soft in T-bill auctions this week. In short, it looks like there is a growing investor reluctance to absorb Treasury supply, especially as the likelihood of further Fed tightening increases.

“Pricing for a Fed hike in October has now reached 70 per cent, and 57 per cent for back-to-back hikes in October and December,” Butcher said.

New York Fed president and FOMC member John Williams has reportedly said that he thinks that another rate hike may be appropriate by the end of the year. Williams was quoted saying (Reuters, others, 24 September) "it's likely that another rate hike may be appropriate by the end of the year. That seems to me a reasonable way of thinking about it".

Meanwhile, Edmond de Rothschild Asset Management highlighted how persistently high interest rates are dominating the markets: rising US yields are increasing pressure on growth stocks and risky assets.

Europe remains vulnerable due to energy risks and rising tensions over French debt, for which borrowing costs are increasing significantly.

Edmond de Rothschild AM is continuing to focus its portfolio allocation on short- to intermediate-term bonds and remains positive on stocks, particularly US stocks, while the firm has begun to take some profits.

The main concern for markets was the higher-for-longer scenario for interest rates, the firm said in a note.

Rising government bond yields, notably in the US, rekindled fears of a more restrictive monetary environment that would prove damaging for risk assets for some time. Yields on 10-year US Treasuries climbed to 5.20 per cent and the two-year yield moved above 4.90 per cent. Yields on the 10-year German Bund also rose sharply. The tension reflects better-than-expected US indicators, soft demand at the week’s Treasury auctions and a persistently restrictive Fed. Growth stocks suffered, the US dollar rose and gold came under pressure.

And yet the week had begun with an equity market rebound led by AI stocks following the success of Meta’s personal assistant, Muse, the asset manager continued. The tool’s ability to optimise certain recurrent consumer expenses bolstered the idea that AI agents were beginning to offer concrete solutions. But worries that the US economy was overheating coupled with the Middle East conflict wiped out initial gains and took global indices back to where they had started.

Europe underperformed due to risks of fresh energy tensions, Edmond de Rothschild AM said. The US is considering banning diesel exports. But that tactic could have the opposite effect. US refineries are already running at close to 94 per cent of capacity and would not produce more fuel while diesel, petrol and kerosene are produced together. That could reduce global supply and exacerbate price rises, especially in Europe.

France is also being closely watched by bond markets. Yields on the 10-year OAT (French government bond) are flirting with 4.70 per cent, up from 3.73 per cent only three months ago, and the spread with the German bund is now around 100 bps. Yields on France’s debt are now higher than on Italian government bonds, a token of increased focus on the fiscal trajectory. France’s deficit this year is now seen at 5.2 per cent of GDP, the negative primary balance at 3.7 per cent and debt at close to 120 per cent of GDP so the situation is becoming strained.

France’s long debt maturity at low average interest rates offers some respite, but the refinancing situation will gradually worsen. A crisis is unlikely in the short term but the danger is that refinancing costs will rise for some time and gradually reduce the government’s leeway.

Edmond de Rothschild AM continues to look for carry opportunities in short- to medium-term maturities with total return profiles that remain asymmetrical at these levels. PCE data will be its main focal point. The firm remains upbeat on equities, and especially in the US, but has started to take some profits. It believes that being underexposed to the US dollar makes sense given valuation levels, fiscal uncertainties in the US and Europe and geographical diversification in its portfolios.

Emerging markets
Elsewhere, US President Donald Trump and the Chinese leader Xi Jinping meeting in Washington brought limited relief, Edmond de Rothschild AM said. Extending the trade truce offers companies some respite, but tensions persist on customs duties, semiconductors, supply chains and rare earths. Washington is sticking with its tech and tariffs pressure while Beijing still holds significant leverage over rare earths. The truce is more pragmatic rather than indicative of a genuine rapprochement.

The MSCI EM was up 1.28 per cent in dollar terms on the week to Friday. Korea, Taiwan and China rose 5.42 per cent, 1.89 per cent and 0.21 per cent; India, Brazil and Mexico were down 1.32 per cent, 1.01 per cent and 0.46 per cent, respectively.