Geopolitical risks detonated the bond market: Trump's tough stance pushed up oil prices, and U.S. bond yields rose to a one-and-a-half-month high

On Wednesday (July 8), influenced by the sudden increase in crude oil prices caused by the sudden change in the geopolitical situation, the yields of various US Treasury bonds rose simultaneously.

Trump publicly announced the end of the US-Iran ceasefire at the NATO summit in Turkey, followed by tough remarks on Iran for the second time at night. Brent crude oil and US crude oil futures jumped sharply, and the market worried that energy prices would once again push up inflation, forcing US bond yields higher. At the same time, the market simultaneously digested Kevin Warsh's first interest rate meeting notes after he became the chairperson of the Federal Reserve. The Fed has serious differences in the direction of interest rates this year, and the long and short views are evenly matched. Under the superposition of the two news, although the bond market did not experience violent fluctuations, the long-term financing pricing center continued to rise, and the global risk-free interest rate ushered in short-term upward pressure.

Geopolitical rhetoric detonates crude oil, inflation fears weigh on U.S. bond yields

The NATO summit held by Trump in Turkey stated that the ceasefire agreement reached by the United States and Iran had expired. Once the statement was released, the international crude oil price rose rapidly, directly triggering the market's panic about the rebound of imported inflation, which in turn drove the full-term yield of US bonds higher.

In a follow-up joint news conference on the same day, Trump appeared on the same stage with Ukrainian President Volodymyr Zelenskyy and issued deterrent remarks, saying: "I will give a little warning in advance, tonight we will carry out a strong strike against Iran." After the United States completed a round of military operations against Iran on Tuesday, this statement further exacerbated the risk of Middle East waterway supply.

According to market data, Brent crude oil futures, a benchmark for global crude oil pricing, closed up 5.43%, with a frozen frame of $78.19 a barrel; West Texas light crude oil futures in the United States rose 4.37% to close at $73.52 a barrel. The sharp rebound in energy prices caused the market to reprice inflation risks. Funds sold US bonds for safety, and bond prices weakened and yields rose simultaneously.

All maturities of US Treasury bonds rose simultaneously, and long and short-term yields collectively rose

The 10-year US bond is the core pricing benchmark of global mortgage, car loan and credit card credit products. The yield on the day rose by more than 4 basis points and closed at 4.58%. The 2-year US bond is closely anchored to the Federal Reserve's short-term interest rate expectations. It also rose by more than 4 basis points and closed at 4.215%; the 30-year ultra-long bond yield, which is more sensitive to geopolitical conflicts, rose by more than 2 basis points and closed at 5.074%.

A basis point of the market's common denomination unit corresponds to 0.01%. Bond prices and yields are in the opposite running relationship. The rise in yields across the board means that US bond assets are generally sold off on that day.

Superimposed Fed meeting notes, policy outlook uncertainty intensifies

Trading funds digested the geo-energy market while simultaneously interpreting the FOMC's June interest rate meeting notes. This meeting was the first policy meeting since Kevin Warsh took office as Federal Reserve Chairperson. The minutes clearly show the current situation of torn internal views.Shield BoIn the absence of complete inflation data, it is difficult for members to form a unified interest rate path judgment.

The minutes record that a considerable number of officials believe that the reasonable federal funds rate will be at or slightly below the current range by the end of this year, but a considerable number of other members anticipate that the interest rate will need to be raised above the current range by the end of the year. There is no obvious bias in the two views, and monetary policy can be loosened or tightened in the future, further expanding the market's game space for medium and long-term interest rates.

After the release of the meeting notes, the US bond market experienced only minor fluctuations, which did not change the overall trend of rising yields on the day.

summary

Overall, the repeated geopolitical conflicts in the Middle East have led to skyrocketing oil prices, and rising inflation expectations are the core driving force behind the rise in US bond yields in this round. Superimposed on the Fed's internal interest rate views are seriously differentiated, and the pricing of global risk-free assets is under short-term pressure. Although the volatility of the bond market is limited, the dual uncertainty of energy and monetary policy will continue to constrain the medium and long-term bond market. The subsequent evolution of the Middle East situation and the US inflation data will jointly determine the future direction of US bond yields.

Daily chart of 10-year Treasury yields, source: latest news

At 10:41 on July 9, Beijing time, the yield on the 10-year US Treasury note was 4.577%.