Two main factors contributed to the increase in bond yields:
- First, the Federal Reserve (the “Fed”) and its Chairman, Jerome Powell, indicated that they would announce a temporary halt to interest rates hikes in the October 31st and November 1st meetings. He also revealed that the rise in bond yields helps in curbing inflation and achieving the desired economic slowdown, despite strong retail sales and employment data indicating the continuation of a strong economy in the US.
- Second, the US fiscal policy has not been resolved in terms of combating inflation, as evidenced by the budget deficit, which reached $1.7 trillion a few days ago, with a 23% increase from 2022. This is in addition to the current absence of a House of Representatives Speaker, which may lead to a government shutdown next month. The market began demanding higher risk premiums to invest in long-term bonds, contributing to the increase in Treasury yields, which have currently surpassed 5% and caused a state of fear in the markets, leading to an increase in volatility.As for geopolitical tension, it reflects on several levels in financial markets: first, shipping rates, and second, cargo insurance prices.
The CDS index for sovereign bond insurance in the region has increased, even in countries with high credit ratings, and this represents a risk premium indicating an increase in the cost of capital. The most important factor is the global rise in interest rates, which puts significant pressure on valuations.
Given the increasing debt burden of countries, the market currently indicates its inability to withstand the real yield on long-term bonds, which stands at 2.5% today.
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