US Treasury selloff spreads to global bonds as 10-year hits 4.78%

US Treasury yields hit a near 20-month high of 4.78 percent Tuesday, dragging Japanese, German and French debt to multi-year peaks as oil above $91 a barrel reignited inflation fears.

"The macro mix is turning more challenging for duration and risk assets," said Wee Khoon Chong, APAC Macro Strategist at BNY. "Hawkish monetary policy, renewed geopolitical and inflation risks, and rising fiscal concerns are converging to maintain the upward pressure on global term premiums and long-end yields."

Japan's 10-year yield closed in on 3 percent, a level not seen for a generation, while German and French long bond yields touched their highest for 15 years on Monday. Bund futures made a new 15-year low in Asia trade Tuesday and French OAT futures traded at their lowest since launching in 2012. Brent crude topped $91 a barrel in morning trade while Europe's benchmark gas price closed at a more than 3-1/2-year high on Monday.

Markets now price a rate hike in New Zealand on Wednesday and an increase in Europe next week, with hikes this month in the US and Japan at better-than-even odds. Friday's US jobs data could open the door to a US hiking cycle starting as soon as this month, after Fed Chair Kevin Warsh signaled policymakers could move if price pressures fail to ease.

The US Treasury market is the epicenter of the move. The 10-year yield rose 2.2 basis points to 4.78 percent, a near 20-month top, as renewed fighting in the Middle East lifted Brent crude above $91 a barrel and stoked inflation concerns. The 30-year Treasury also touched a 19-year high, extending the pressure across the long end of the curve. The repricing rippled outward because the drivers are global: higher oil prices and rising US-Iran tension are feeding inflation worries just as Warsh has reset expectations for the outlook.

The transmission has been unusually synchronized. Japan's 10-year yield closed in on 3 percent, a level not seen for a generation, while German and French long bond yields touched their highest for 15 years on Monday. Bund futures made a new 15-year low in Asia trade Tuesday and French OAT futures traded at their lowest since launching in 2012. The last time Japanese duration traded near 3 percent was a generation ago, and the European move marks the steepest repricing of long-end yields since the eurozone debt crisis.

The breadth of the move has offered only limited support to the dollar, since borrowing costs are rising everywhere rather than in the US alone. The euro held at $1.1619 and the yen at 159.76 to the dollar. Rising fiscal concerns are adding to the pressure on term premiums, with investors demanding higher compensation to hold long-dated sovereign debt across multiple markets.

Equities are absorbing the higher discount rates. Japan's Nikkei dipped 0.2 percent in early trade and the Hang Seng fell 0.7 percent, with the tone set by the lackluster debut of clothier Shein Global, whose shares slipped below an offer price already marked down from earlier fundraising rounds. US futures steadied after Wall Street indexes notched modest overnight falls, but the mood was nervous ahead of Friday's data.

Geopolitics is compounding the inflation impulse. US President Donald Trump has threatened further strikes against Iran after the first exchange of fire in a month, while stepped-up fighting between Russia and Ukraine has wheat prices trading close to three-year highs. Europe's benchmark gas price closed at a more than 3-1/2-year high on Monday.

If Friday's US payrolls come in hot, the case for a September hike strengthens and long-end yields could push higher still; a soft print would ease the pressure on duration. Either way, the synchronized repricing of global interest rate expectations is the story to watch.

This article is for informational purposes only and does not constitute investment advice.