US Treasury Secretary Scott Bessent told G20 finance ministers and central bankers this week that the United States was a leader in addressing sovereign debt issues in emerging markets and low-income countries, but analysts said he was also grappling with serious debt issues closer to home.
With the US 10-year Treasury yield rising to a 20-month high of 4.78 per cent, Tuesday’s discussion in Asheville, North Carolina, landed amid a global sell-off of rich countries’ sovereign debt that has also sent benchmark bond yields in Japan and the United Kingdom to levels unseen in decades.
Analysts warned that the rise in yields was approaching worrying territory for the global economy as higher borrowing costs worked their way through to government, companies and households and reduced the amount investors were willing to pay for stocks.
“We’re heading into the concern zone, which is the other side of 5 per cent for the 10-year Treasury … where alarm bells would begin to ring,” said Padhraic Garvey, regional head of research for the Americas at ING.
Current levels were not a mispricing, Garvey said, but it would be a tipping point if the US 10-year yield rose past 5 per cent and the euro zone 10-year yield reached between 3.5 per cent and 4 per cent. The main driver behind the Treasury yield increase was not higher inflation expectations but higher real yields, he said, adding that was worrying for American companies because they could not increase prices to offset the impact.
As investors woke up to that risk, the underlying implication for various risk assets, including stocks, could be significant, he said. They would eventually realise that they had to discount future earnings at a structurally higher real yield, while rising yields would also have direct impacts on products such as mortgage rates.