Finance

It is A brave investor who calls the end of a four-decade trend. But bond yields have risen so far and—in recent weeks—so fast that many market participants now believe the era of low interest rates to be over. Since early August America’s ten-year Treasury yield has traded in excess of 4%, a level unseen from 2008 to 2021. On October 3rd it hit a 16-year high of 4.8%, having risen by half a percentage point in a fortnight. The moves have spilled over globally: to Europe, where they threaten to bring about a fiscal crisis in indebted Italy, and Japan, which is clinging on to rock-bottom interest rates by its fingertips (see chart 1).image: The EconomistWhat is going on? Start in America, with some financial mechanics. Investors who hold Treasuries typically have the option of lending in money markets, in which overnight interest rates are set by the Federal Reserve. The yield on the shortest-maturity Treasuries therefore tracks Fed policy. At longer maturities yields reflect two extra factors. One is expectations of how the Fed will change rates in future. The other is the “term premium”, which compensates investors for the chance of nasty surprises: that forecasts for interest rates or inflation turn out to be wrong—or even, in theory, that the government defaults.Both policy expectations and the term premium have driven up yields. After America’s banking turmoil in the spring, investors feared recession and expected the Fed to cut interest rates this year. Then the turmoil ended, fears faded and forecasts for economic growth rose. Markets came around to the view espoused by the Fed itself: that it will hold rates higher for longer. At the same time, many policymakers and investors nudged up estimates for where rates will settle in the long term. Investors were not pencilling in more inflation, expectations for which have been fairly stable. Instead, expected real interest rates soared (see chart 2).image: The EconomistIn recent weeks things have changed. The New York Fed publishes a daily estimate of the term premium on the ten-year Treasury yield, derived from a financial model. Since August it has risen by 0.7 percentage points, enough to fully explain the rise in bond yields over that time.Some attribute the surge in the term premium to simple supply and demand. The Treasury has been on a borrowing binge. From January to September alone it raised a whopping $1.7trn (7.5% of GDP) from markets, up by almost 80% on the same period in 2022, in part because tax revenues have fallen. At the same time, the Fed has been shrinking its portfolio of long-dated Treasuries, and some analysts think China’s central bank is doing the same. Traders talk of price-insensitive buyers leaving the market, and of those who remain being more attuned to risk.Others point to fundamentals. Outside America, the global economy looks wobbly. In downturns, investors’ appetite for risk falls. The oil price has risen, America’s government could yet shut down and the House of Representatives is in turmoil. The uncertain effects of all this pushes up the term premium. As well as affecting the supply of new Treasuries, America’s gaping fiscal deficit is a long-term phenomenon. A rule of thumb from one literature review suggests it is large enough to be forcing up the interest rate the Fed must set to stabilise inflation by nearly three percentage points.In fact, the trajectory of America’s public finances is so dire that the most bearish investors talk of the long-term risk of “fiscal dominance”; that interest rates might eventually be set with the goal of controlling the government’s debt-service costs, rather than inflation. Although markets have not priced in much more long-run inflation yet, measures of inflation risk—which affects the term premium—have rebounded since falling earlier this year.Regardless of their cause, movements in America’s bond markets set the pace elsewhere. Higher rates in America tend to push up the dollar, encouraging other central banks to tighten in order to avoid suffering inflation from pricier imports. And term premia are correlated globally, owing to the mobility of capital.Reflecting these spillovers, rates in the euro zone have risen in recent weeks, too, even though the economic picture is different. Surveys indicate the bloc is already in recession. Across the zone, fiscal deficits are smaller and the European Commission is debating how to cut state spending.But dealing in aggregates does not make sense when each country runs its own budget. Rising rates have brought back worries about the sustainability of public finances in the euro zone’s most indebted big economy. Italy’s ten-year bond yield is now 4.9%, its highest since 2012, when the euro-zone’s debt crisis was raging. It is more than its budget can bear for long without fast economic growth or austerity. The spread over German ten-year debt is now just below two percentage points. Investors in Italian debt do fear that they might not get their money back—or that one day they may be repaid in lira. Look to Japan, though, for the most dramatic immediate consequences of rising yields. The Bank of Japan has been an outlier, keeping interest rates at -0.1%, even as inflation has risen. It also continues to cap ten-year bond yields at 1%, a ceiling it lifted from 0.5% in July. On September 29th it announced an unscheduled purchase of ¥301bn ($2bn) of bonds in defence of the cap, as bond yields neared 0.8%. On October 4th it returned to the market with a buy of ¥1.9trn. Rumours swirled that the authorities may have intervened to support the yen on October 3rd after the yen briefly reached 150 to the dollar only to snap back suddenly to 147. That would be in line with past practice. Last October the authorities tried to defend the currency for the first time in 24 years after it crossed the 150 mark. If the long era of low rates really is over, many other financial rubicons could be crossed in the months to come. ■ More

The Fluor Corporation logo is displayed on a smartphone.
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Check out the companies making headlines in midday trading.
Fluor Corporation — The engineering and construction company gained 2.4% after UBS upgraded Fluor shares to buy. The Wall Street firm is bullish on Fluor after reaching agreements to complete new projects.

Carnival — Cruise line stocks rose as a group during midday trading. Carnival and Norwegian Cruise Line added 2.8% and 3.9%, respectively. Royal Caribbean shares gained nearly 3%. Those moves followed a steep decline in oil prices.
Sunnova Energy, Sunrun — Sunnova Energy added 2.2%, while Sunrun declined 1.1% after Truist downgraded the solar stocks to hold from buy ratings, citing near-term concerns from elevated interest rates.
Cal-Maine Foods — Shares slipped 7.3% after the egg producer provided a weak earnings report, citing a dynamic market environment. The company reported fiscal first-quarter earnings of 2 cents per share, missing the consensus estimate of 33 cents per share from analysts polled by FactSet.
Intel — The chipmaker rose slightly by 0.7% after Intel said its programmable chip unit will be a stand-alone business, with an initial public offering planned within the next two to three years.
DexCom, Insulet — Diabetes names DexCom and Insulet fell 3.5% and 3%, respectively, after a study released Tuesday suggested a class of popular weight loss drugs GLP-1 could affect the need for basal insulin. Separately, Insulet said on Tuesday that Wayde McMillan would step down as chief financial officer.

Energy stocks — Energy stocks fell as a group during midday trading Wednesday as oil prices slid more than $3 a barrel. Marathon Petroleum shares were down 3.7%, while Phillips 66 shares dropped 4.5%.
— CNBC’s Alex Harring and Samantha Subin contributed reporting. More

Signage outside Intel headquarters in Santa Clara, California, Jan. 30, 2023.
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Check out the companies making headlines before the bell.
Intel — Shares popped 2.5% after the chipmaker announced it would be operating its programmable chip unit as a standalone business complete. Intel plans to conduct an initial public offering for the unit within the next two to three years.

Fluor —  Shares climbed 2.4% following an upgrade to buy at UBS. The firm is bullish on the stock thanks to progress on legacy projects and said Fluor is on the brink of a company turning point. 
Apple — The iPhone maker shed 0.9% after KeyBanc cut its rating on Apple to sector weight from overweight late Tuesday, citing shares’ high valuation and an expectation for soft growth in the United States.
Sunrun, Sunnova Energy International — Shares of Sunrun and Sunnova dropped 3% and 2.8%, respectively, after Truist Securities downgraded the solar panel installers to hold from buy on Wednesday. The firm said higher-for-longer interest rates could hit solar energy stocks.
Moderna — The pharma stock rose slightly after Moderna announced positive interim results from the Phase 1/2 trial of mRNA-1083, an investigational combination vaccine against influenza and Covid. Moderna said in a press release it plans to begin a Phase 3 trial of the combination vaccine in 2023, working to accomplish potential regulatory approval in 2025.
Oddity — The Israel-based beauty stock, which owns direct-to-consumer brands Il Makiage and SpoiledChild, added 3.2% after Bank of America upgraded it to buy from neutral. The bank said it expects sustainable annual sales growth and margin expansion.

Novartis — Shares lost 3.7% after the Swiss drugmaker completed the spinoff of its generics and biosimilars business Sandoz, which dipped on its market debut on the SIX Swiss Exchange.
Cal-Maine Foods — The stock plunged 11.6% after the company came out with disappointing sales figures due to lower prices. The egg producer reported fiscal first-quarter earnings of two cents per share, while analysts polled by StreetAccount had called for earnings of 33 cents per share. Revenue was also lackluster.
— CNBC’s Brian Evans and Lisa Han contributed reporting. More

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Wall Street forecaster Jim Bianco expects Treasury yields to go a lot higher — and possibly overshoot through 5% in the next couple of weeks.
“I don’t think we’re near the end of this move in the bond market,” the Bianco Research president told CNBC’s “Fast Money” on Tuesday.

If the Federal Reserve hints about ending interest rate hikes while investors still sense inflation, Bianco warns they won’t buy bonds.
“That’s what I think has been killing the bond market,” he said. “The more the Fed talks about being done, waiting [and] assessing all the rate hikes they’ve done — the more that they’re making it worse.”
Yields on the 5-year and 10-year Treasury notes, as well as the 30-year Treasury bond, hit their highest levels since 2007. The 10-year Treasury yield reached 4.8% on Tuesday. Bianco sees 4.5% as fair value.
“We’re just a little bit above fair value right now. I think what you see in the bond market is a capitulation,” noted Bianco. “Most of the year bond investors [and] bond managers have been long. They’ve been trying to argue why we’re going to have a recession. Why there’s going to be a rally. And, they’ve been getting their brains beat in, and they can’t take it anymore.”
The volatility in the bond market is extending to stocks. The Dow Jones Industrial Average saw its worst daily performance since March and is now negative for the year. The S&P 500 and the Nasdaq Composite also closed the day more than 1% lower.

The latest jitters over surging yields come a day after CNBC on-air editor Rick Santelli delivered a warning to investors on “Fast Money.”
“We have a lot of potential room to run to the upside,” Santelli said on Monday. “If somebody asked me and held a gun to my head and said ‘listen, [in] the worst-case scenario, where are Treasury rates going to go? 10-year?’ I’d say in the next seven years, you should be able to see 13.5%, 14%.”
Bianco considers yields that high an extreme situation. “13%? That would take something bad to happen — a lot worse than I anticipate,” he said.
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Bill Gross, Portfolio Manager, Janus Capital Group
Lucy Nicholson | Reuters

Widely followed investor Bill Gross believes Treasury yields have the potential to shoot even higher in the short run.
“I think we’re gonna go to five [percent],” Gross said on CNBC’s “Last Call” on Tuesday, referring to the 10-year Treasury yield. “The market certainly is oversold at the moment in anticipation of Treasury supplies, in anticipation of higher for longer in terms of the Fed.”

The stock market suffered a severe sell-off Tuesday as surging bond yields rattled Wall Street. The S&P 500 dropped 1.4%, touching its lowest level since June during the day as the 10-year Treasury yield reached its highest point in 16 years.
The benchmark yield has surged in the past month to touch 4.8% as the Federal Reserve pledged to keep interest rates at a higher level for longer. The 30-year Treasury yield hit 4.9% Tuesday, also the highest since 2007.

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10-year Treasury yield

“I think maybe 5% caps it for the near term. It depends, of course, on inflation, depends on economic growth,” the former chief investment officer and co-founder of Pimco said.
Billionaire investor Ray Dalio also said Tuesday that the surging 10-year rate could test 5% as he sees hotter inflation for longer.
Gross, once known as the bond king, believes that the Fed’s aggressive rate hikes undertaken since March 2022 have had a significant effect on the yield curve. The central bank has taken interest rates to the highest level since early 2001.

Gross said investors are now grappling with the negative impact that comes from a deepening Treasury deficit.
“What we’re seeing is a recognition of the Treasury deficit that is $2 trillion-plus, and that’s affecting the long end, as is, I think, in the last few days, the selling of ETFs, which basically own long bonds as opposed to short bonds,” Gross said. More

The job market looks a lot like one that preceded the Covid-19 pandemic: one characterized by low unemployment and good job opportunities, economists said.
Workers’ confidence has deteriorated, though.
That’s partly because of financial stress amid higher interest rates and inflation, economists said.

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The job market remains strong despite gradual cooling from pandemic-era highs, according to labor economists — but workers don’t seem to share that outlook.
Employee confidence fell last month to its lowest level since 2016, according to Glassdoor data. About 46% of workers reported a positive six-month outlook for their employers, down from 54% from a year ago.

Meanwhile, the ZipRecruiter Job Seeker Confidence Index was down six points in the second quarter to its lowest point since the beginning of 2022.
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The juxtaposition of a resilient labor market but deteriorating sentiment is likely due to financial stress among workers and the fact that the recent baseline was a scorching-hot job market in 2021 and 2022, economists said.
“Overall, workers still have more leverage and more job security than before the pandemic,” said Julia Pollak, chief economist at ZipRecruiter.
“I think job seekers comparing this environment to 2021 and 2022 do feel worse off,” she added. “It’s taking more effort to find a job, and jobseekers are searching under greater financial strain now.”

The job market is stable but not ‘gangbusters’

Several metrics — including job openings, quits, layoffs and the unemployment rate — suggest the labor market is healthy, economists said.
Daniel Zhao, lead economist at Glassdoor, said it is “softer but steady.”
“If you look at these indicators in aggregate, they point to a labor market that isn’t necessarily going gangbusters, but in a fairly stable state,” Zhao said.
Broadly, the indicators are largely in line or even stronger than pre-pandemic, a time when unemployment was low, people were joining the labor force and gender and racial employment gaps were narrowing, Pollak said.

I think a lot of folks are comparing the labor market today to a year or two ago when things were hot. But of course, there were also problems with the economy of 2021 and 2022.

Daniel Zhao
lead economist at Glassdoor

“That’s a very good thing,” she said.
The quits rate — a barometer of workers’ willingness or ability to leave a job — was 2.3% in August, the same as February 2020, the U.S. Department of Labor reported Tuesday.
It was unchanged from July, though down from a 3% peak in April 2022 when a record number of workers were quitting, in what became known as the great resignation.
Likewise, the hiring rate is slightly below but roughly similar to its level in February 2020.
Layoffs are still 15% lower than before the Covid-19 pandemic and job openings — a gauge of employers’ demand for workers — are 37% higher, according to Labor Department data.

The problems with the 2021, 2022 job markets

In fact, job openings rose significantly, by 690,000, to 9.6 million in August, the Labor Department reported Tuesday.
However, there are reasons to think that increase is anomalous, economists said. For one, the data series is generally volatile, subject to big ups and downs from month to month. The broader trend is clear: Job openings, along with quits and hires, have cooled from their pandemic-era peaks, economists said.
“I think a lot of folks are comparing the labor market today to a year or two ago when things were hot,” Zhao said. “But of course, there were also problems with the economy of 2021 and 2022.”

Among the problems: Inflation touched its highest level since 1981, eroding the big raises workers had been getting due to lost purchasing power. Also, certain sectors such as technology hired overzealously, Zhao said, leading big tech firms to lay off tens of thousands of people.
A labor market that runs too hot is unsustainable, as job turnover and wage growth get so high that they feed into inflation, Zhao said. It’s unclear the extent to which this may have occurred in the recent inflationary bout.
“The labor market that we’re getting today is in a healthier spot, even though for many workers, it isn’t quite as easy to find a job or get a raise,” Zhao said.
Of course, it’s unclear if — and the extent to which — the labor market will continue cooling, economists said. In addition to higher interest rates, there are economic headwinds such as continued strikes by auto workers, high oil prices and another government shutdown threat looming in November, Zhao said. More

McCormick spices are displayed on a shelf at a supermarket in San Anselmo, California, on March 28, 2023.
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Check out the companies making headlines in midday trading.
Warby Parker — The eyewear maker popped 3.4% after Evercore ISI upgraded shares to outperform from in line. The firm said 2024 should be a “fundamental inflection year” for Warby Parker.

Trex — Shares of the wood-alternative decking manufacturer declined 3.8% even after Goldman Sachs initiated Trex with a buy rating. The bank said the company is “well-positioned” to drive growth and profitability.
Eli Lilly, Point Biopharma — Eli Lilly shares slumped 2.4% after the pharmaceutical giant announced plans to purchase cancer therapy developer Point Biopharma for $12.50 a share in cash, or about $1.4 billion. Point Biopharma shares surged nearly 85%.
Rivian Automotive — Shares of the electric vehicle maker lost 8.3%, even though Rivian’s deliveries topped estimates and showed sustained demand. Morgan Stanley earlier reiterated the company as overweight, saying Rivian’s FY23 production guide of 52,000 units supports the firm’s delivery forecast of 48,000 units. Concerns remain about softening demand for EVs in the U.S. due to higher borrowing costs.
Airbnb — The short-term vacation rental company fell 6.5% after KeyBanc downgraded the stock to sector weight from overweight. KeyBanc said Airbnb’s margins will be squeezed as post-pandemic travel demand eases.
McCormick — Shares of the spice maker slipped 8.5% after McCormick reported earnings of 65 cents per share, excluding items, for the recent quarter, on revenue of $1.68 billion. That came roughly in line with earnings per share of 65 cents and $1.7 billion in revenue expected by analysts polled by StreetAccount.

Meta — Shares of the social media behemoth slipped more than 1.9% following news that the company is considering charging European Union Facebook and Instagram users a $14 monthly fee to access both platforms without ads.
Fiverr International — Shares gained 0.5% after Roth MKM upgraded the company to buy from neutral. The Wall Street firm is “incremental positive” on the stock, citing a freelancer survey that supports Fiverr’s leading position among gig workers.
Ally Financial — The home and auto company lost 3.2%. Earlier in the day, Evercore ISI added a tactical outperform rating on the stock, noting it appears oversold near term. However, Evercore ISI reiterated a long-term in-line rating on Ally and trimmed its 12-month price target.
— CNBC’s Alex Harring, Brian Evans, Samantha Subin and Jesse Pound contributed reporting. More

This year Saudi Arabia and its allies in the Organisation of the Petroleum Exporting Countries (opec) have been trying to climb what seems like a particularly slippery slope. Despite production cuts, crude-oil prices, which exceeded $115 a barrel for much of June 2022, languished below $80 a year later. Then the cartel appeared to regain control after Saudi Arabia decided on an extra output cut of 1m barrels a day (b/d)—equivalent to 1% of global demand—which it has since extended until the end of the year. Signs that the global economy might avoid a recession after all also helped. On September 27th oil prices neared $97 a barrel.But this week OPEC and its allies, including Russia, succumbed to the slope once again. On October 4th, the very day the group confirmed its cuts until the end of the year at a meeting in Vienna, oil prices dropped by more than 5%, to $86 a barrel. Amid such volatility, pundits are debating where prices will go next. The bears reckon that crude will stay at this level until Christmas, or maybe even fall further. Meanwhile, bulls predict a rebound before too long; some still foresee triple digits before the festive season. The stakes are high, and not just for opec. Dearer oil would push up inflation, which could force central banks to keep policy tighter than they would otherwise like, and would also deal a heavy blow to the global economy.image: The EconomistUnexpectedly resilient demand for oil is at the heart of the bulls’ case. Economic and literal headwinds, in the form of a mighty typhoon, failed to deter Chinese tourists and businessfolk from travelling a record amount this summer, boosting demand for petrol and kerosene. Growth in global demand for “mobility fuels”, at nearly 1.6m b/d, has remained unchanged in the year to date. Around the world, daily flights in the week ending September 29th averaged 96% of levels in 2019, their highest share since mid-July. Diesel demand growth has also remained robust, in part because of frantic trucking in Asia.Bulls also see that supply cuts are filling producers’ pockets, raising the possibility that they may be extended into 2024. Despite lower export volumes, Saudi Arabia’s revenues could be $30m a day higher this quarter than last, a jump of 6%, reckons Energy Aspects, a consultancy. Russia’s revenues are also up. Both can take comfort from the fact that, unlike in the late 2010s, when opec and Russia first teamed up to cut supply, American shale drillers are not filling the gap. Production is rising for the moment, but they are shutting wells, squeezed by higher costs. Rig numbers are down 20% from last November.This week’s decline also reflects “profit-taking” by traders, bulls argue. They point to a forecast 1.5m-2m b/d supply deficit for the year as whole, most of which is due to materialise in the last quarter, as record production by non-opec countries, such as Brazil and Guyana, is finally outpaced by the cartel’s cuts. This will force users to dig deeper into their reserves. America’s crude stocks fell by 2.2m barrels to 414m barrels in the week to September 29th; a decline that may accelerate as refineries seek more crude after their maintenance season, which runs through October.The bears reckon all these inflationary signals will be blown away by the economic gale heading the world’s way. The Fed has said it is ready to keep interest rates higher for longer which, together with a slowdown in hiring and jumpy bond yields inflating the cost of debt, will dampen growth. This “very unsettled picture” is being made murkier still by political chaos, says Adi Imsirovic, a former oil-trading chief at Gazprom, an energy giant, with America’s House of Representatives, on which all federal spending decisions depend, ousting its speaker on October 3rd.Signs of demand destruction caused by the recent price spikes are becoming visible, with American gasoline use falling to its lowest seasonal level since 2001. Pressure from raised oil prices is also feeding through to “core” inflation, which excludes food and energy costs, as firms in other sectors, starting with transport, raise their prices to compensate. The Cleveland branch of the Federal Reserve’s “Nowcast”, which uses oil and petrol prices as inputs, projects it will edge up to 4.19% year on year this month, from 4.17% in September. On top of all this, higher interest rates in America push up the dollar’s value, making oil more expensive for everyone else.The bears have the upper hand, then, but the question is how long the situation will hold. Saudi Arabia’s enduring cuts mean the market remains extremely tight. Jorge León, a former OPEC analyst, now at Rystad Energy, a consultancy, reckons that prices will soon return to somewhere in the low $90s. Surprising economic data could cause swings of as much as $5-10 a barrel; several surprises could even push prices briefly into the triple digits.Yet any victory for the bulls will be a short-lived one. Beyond Christmas, bears look likely to gain a durable advantage. Non-opec production growth should cover most of the rise in demand, which will anyway be subdued by the lagging impact of high rates. Kpler, a data firm, projects a solid surplus for the first few months of 2024.There is still an unknown. Although Saudi Arabia has given hints that it is worried about the economic prospects of its Asian and European customers, lower benchmark prices may nonetheless push it to bigger production cuts. If there is a glut of supply, such cuts may not be enough to push up prices. But they will prevent the rebuilding of stocks, which normally happens during downturns. That would set the stage for the next oil-price thriller. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More