Market-Update: “I am the house now”

Whereas the equity markets have recently been trading sideways at high levels amidst volatility, the fixed-income markets have come under increasing pressure in recent weeks. In the United States in particular, Treasury Secretary Scott Bessent is actively seeking to counter this trend. At the same time, rising energy prices and high public debt are bringing the debate on inflation and interest rates back into the spotlight.

“The House always wins” – In the casino, it’s clear who holds the upper hand. US Treasury Secretary Scott Bessent also appears to be seeking to apply this logic to the bond market at present. With the statement “I am the House now”, he is emphasising his determination not to stand idly by while yield pressures have recently been rising sharply, but to take proactive measures to counteract this situation. As the chart below shows, US interest rates have been rising steadily for years.

Recently, however, the momentum has accelerated significantly once again, meaning that the “magic threshold” of 5% for 30Y bonds has already been exceeded – a level last seen more than 20 years ago, before the financial crisis.

The powerful bond market is clearly giving the US government a warning – the national debt, which has been rising sharply for years, and above all the enormous refinancing costs, are putting US Treasury bonds – long the epitome of a safe haven – under considerable pressure. The US government could put a swift end to the rise in interest rates by adopting a more disciplined budget – but this is clearly not an option for Trump, and so Scott Bessent is taking on Wall Street. However, his latest announcement – to triple the US Treasury bond buyback programme to USD 6bn – has had no calming effect; on the contrary, interest rates are set to continue rising for the time being.

The oil price is also having a negative impact

Interest rates are not only rising in the USA; in Europe and Japan, too, we can see the highest levels in recent history. There is a certain contagion effect at play, but the situation is also linked to generally higher interest rate expectations. As expected, the ECB raised its key-lending rate to 2.5% in September, and further rate rises by the end of the year now appear entirely possible.

This is primarily due to the recent increase in energy prices and the associated inflationary concerns. Despite the upcoming US mid-term elections, the Iran conflict appears to be at an impasse, which means that the vital Strait of Hormuz remains closed. Even the most important alternative route via the Red Sea is likely to be increasingly at risk, now that the Iran-backed Houthi rebels have brought the coastal region of Yemen under their control.

We are therefore heading into the cold season with an oil price well above the key psychological threshold of USD 100. The situation on the European gas market is causing further unease. German gas storage facilities are at their lowest levels in 15 years, and the doubling of gas prices since June shows just how sensitively the market is reacting to potential supply bottlenecks. Should the coming winter turn out to be cold, conditions could become uncomfortable in more ways than just the weather.

Equities remain resilient

So far, the equity markets have remained surprisingly unfazed by rising interest rates and energy prices. Solid earnings and robust economic data continue to support share prices, although the headwinds are certainly growing.

 

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