Risks from military clashes between the United States and Iran are affecting financial markets. The U.S. Government Bonds yields jumped to the highest level in a year and a half, and international oil prices broke through $100 a barrel, heightening inflation concerns. Initial jobless claims in the United States also fell to the lowest level in 57 years, drawing attention to the U.S. Federal Reserve (Fed)'s decision.
On the 23rd (local time), according to the electronic trading platform Tradeweb, the 10-year U.S. Treasury yield stood at 4.71% shortly after the New York market opened, up 0.05 percentage points from the previous session. It was the first time since January last year that the 10-year yield topped 4.7%. It also exceeded the 4.69% recorded in May.
Other maturities rose across the board. The 30-year Government Bonds yield climbed 0.04 percentage points to 5.19%, the highest in two months since May 20. The 2-year Government Bonds yield, which reacts sensitively to the Fed's monetary policy, also rose 0.05 percentage points to 4.36%.
As long-term rates, which serve as benchmarks for mortgage loan and corporate borrowing rates, jumped across the board, caution is increasing in global financial markets.
The source of the rate surge is oil prices. September Brent crude futures jumped more than 6% around the New York market open, briefly touching $100 a barrel intraday. It has been a month since oil hit the $100 level on the 26th of last month.
Behind this are the de facto reclosure of the Strait of Hormuz and new armed clashes. The United Kingdom Maritime Trade Operations (UKMTO) said a tanker was attacked in the Red Sea southwest of Saudi Arabia, and Yemen's Iran-aligned armed group, the Houthi rebels, claimed responsibility.
Earlier, the Houthi rebels declared a maritime blockade of Saudi Arabia. Brent was only slightly above $70 a barrel in early July, but it has surged to $100 in just a few weeks. The market sees the oil price spike as unlikely to be a one-off.
On top of that, a still-solid labor market added to upward pressure on rates, analysts said. Last week's U.S. initial jobless claims came in at 187,000, the lowest since 1969. Coming in well below the market forecast of 212,000, it confirmed that the labor market remains firm.
Accordingly, expectations are strengthening that the Fed will raise the benchmark rate in September. A decline in claims can heighten inflationary pressures through wage gains and consumption, making it a metric that can influence the Fed's monetary policy decision.
According to the Chicago Mercantile Exchange (CME) FedWatch, the interest rate futures market raised the probability that the Fed will increase the benchmark rate by at least 0.25 percentage points by September to 81% from 77% the previous day.
The Fed plans to hold the Federal Open Market Committee (FOMC) on the 28th–29th to decide the benchmark rate. While this meeting is widely expected to keep the rate on hold, the market is nevertheless mentioning the possibility of at least one rate hike within the year.