Bond yields were in the spotlight this week, with the 10-year Treasury yield near its year-to-date high and the 30-year Treasury yield reaching its highest level since 2007. With limited economic news this week to explain the move higher in yields, analysts have pointed to several factors that may be contributing to the upward pressure. Per the Securities Industry and Financial Markets Association (SIFMA), U.S. corporate bond issuance was nearly 27% higher through July relative to last year. This increase in the supply of corporate bonds, which typically offer a yield premium over Treasuries, has to be absorbed by investors and can compete with Treasuries for investor demand. Second, growing concerns over the U.S. government’s fiscal situation are likely adding to the upward pressure on yields. The U.S. reported a $432 billion budget deficit for July, which was the largest monthly shortfall since March 2021, while the national debt reached a record $40 trillion. As a result, investors may demand higher yields on longer-term government debt to compensate for increased fiscal uncertainty and the growing supply of Treasuries. Lastly, following comments from Treasury Secretary Bessent on plans for unprecedented economic pressure on Iran, oil prices have continued to rise, fueling concerns about the duration of the conflict and its potential impact on inflation. Higher inflation expectations can also place upward pressure on longer-term yields.
Higher yields have implications for consumers through borrowing costs such as mortgages and auto loans, as well as for corporations accessing the debt market. The rise in yields contributed to negative sentiment in equity markets this week, with each of the three major U.S. equity indexes finishing the week in the red. The tech-heavy Nasdaq was the main laggard, down 2.65% for the week, followed by the S&P 500 down 1.41% and the Dow down 0.84%. At the sector level, eight of the 11 sectors finished the week lower, with technology (-3.54%) and industrials (-3.51%) being the worst performers. Health care, one of the more defensive sectors, was the best performer this week, finishing up 4.33%. Energy, which continues to benefit from rising oil prices, also finished the week higher by 2.77%, followed by materials up 1.86%. Health care, energy, and materials are now the best-performing sectors for the month of August, followed by technology and communications. Utilities, which is a more interest-rate-sensitive sector, has been the worst performer for the month, down 3.59%.
Looking ahead to next week, investors will be watching to see whether the Treasury’s announced increase in long-dated debt buybacks provides any relief to yields. In addition, developments regarding plans for additional economic pressure on Iran will play a role next week, as Bessent has said that more specific details will be unveiled on Monday. On the economic front, next week comes with the release of the Fed’s preferred inflation gauge, the core PCE price index, as well as data on personal income and spending. NVIDIA is also scheduled to report earnings on Wednesday, giving investors another look at the durability of AI-related demand, which has come under greater scrutiny over the last few months.
