Trading Day: Bonds slam stocks

By Jamie McGeever

ORLANDO, Florida, Aug 18 (Reuters) - The widespread selloff across global ‌sovereign bond markets deepened on ​Tuesday, pushing long-dated ​yields to fresh multi-decade highs and rattling stocks, while investors also grappled with the inflationary signal from global oil prices hitting a three-week high.

In my column today, I dig into the latest "TIC" flows data for June. Official sector demand for U.S. debt has been flat-lining for some time, and central banks have also chalked up ‌record sales of T-bills in recent months. So the last thing Treasury needs is foreign private sector demand to cool too. Yet this may ⁠be happening.

If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.

1. Global bond markets put governments on notice over fiscal, inflation risks

2. As U.S. ‌debt mounts, investors demand higher returns to lend

3. Even ‌as market clouds clear, AI investment anxiety still gnaws: Mike Dolan

4. Oil market starts pricing in a prolonged Hormuz crisis: Bousso

5. Meta targeted children to boost Facebook and Instagram use, lawyer says as landmark trial begins

Today's Key Market Moves

• STOCKS: South Korea -1.5%, Japan -2.5%. Europe -0.6%, UK flat. Big U.S. indices down between 0.2% (Dow) and 1.3% (Nasdaq).

• SECTORS/SHARES: Seven sectors on the S&P 500 ​fall, four rise. Tech -2%, healthcare and energy +1.7%. Philadelphia semiconductor index -5%. Johnson & Johnson +3.3%, Caterpillar -4.6%.

• FX: Dollar flat on soft U.S. data but USD/JPY back up towards 160.00. Biggest G10 gainer is NZD, +0.5%. Biggest EM decliner is CLP -1%, COP best EM unit +1%.

• BONDS: Japan leads global rout, 10-year JGB yield at a 30-year high of 2.945%. U.S. 10-year yield 4.7480%, highest since January ⁠2025; 30-year yield 5.33%, highest in 19 years. U.S. 2s/30s curve steepest since April.

• COMMODITIES/METALS: Oil hits 3-week high, gold -1%.

Today's Talking Points:

Oh oh oh, the steepest thing

Government bond yield curves around the world are steepening, mostly driven by the long end as ​investors get increasingly twitchy about inflation, public finances, and policymakers' ability — or willingness — to get them under control. Some of the moves have been quite dramatic, especially in the U.S., where the spread between the 30-year yield and fed funds rate — ultra-long end vs ultra-short end — is the ​widest in four years.

But isn't this simply more a case of returning to long-term averages than a cause ‌for concern? Curves have been so flat for so long, partly thanks to central bank QE and forward guidance. Indeed, the U.S. 2s/30s curve was negative during 2023 and 2024. And surely 30-year borrowing costs should be substantially higher than the overnight rate. The worry is the pace of ⁠adjustment, not the path.

The Big Issuance

Some analysts argue that the selling pressure bearing down on Treasuries is due to the "crowding out" effect of surging corporate bond issuance. As a flood of new bonds hits the market, especially from Big Tech, there's less capital to go round. If investors buy more corporate bonds, demand for sovereign debt weakens, prices fall, and yields rise.

Some say it's a compelling argument, but others dismiss the theory. What cannot ⁠be dismissed is the rise in corporate bond issuance. 2026 will be a record year. Issuance so far this year has totaled almost $1.7 trillion, according to SIFMA data, up around 27% on the same period a ​year earlier and well on the way to beating last year's record $2.2 trillion. August issuance has already outpaced July's total. As yet, no tipping point.

Cracked it

The impact on commodity and energy markets from the closure of the Strait of Hormuz and curtailed supply from Russia goes well beyond headline crude oil and gas pump prices. It's an obvious point, but sometimes needs repeating — fertilizers, chemicals and refining markets are all being thrown ‌into a tailspin too. One key gauge of energy market stress has just entered uncharted waters.

The U.S. diesel crack, a measure of refining profitability, has surged above $100 a barrel for the first time ever. The so-called "crack spread" is the premium of U.S. diesel futures over WTI crude ‌oil futures. Industries run on diesel. Do producers and manufacturers absorb the hit to margins, reduce output, or pass the soaring cost onto consumers?

What could move markets tomorrow?

• Indonesia interest rate decision

• UK inflation (July)

• U.S. Treasury sells $16 ⁠billion of 20-year notes at auction

• U.S. Federal Reserve publishes minutes of its ‌July 28-29 policy meeting

• U.S. retailers TJX, Target and ​Lowe's report earnings

Want to receive Trading Day in your inbox every weekday morning? Sign up for my newsletter here. Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

(Reporting by Jamie McGeever; ‌Editing by Nia Williams)

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