View from the markets: Is this the new (old) normal for government bond yields?

US government bond yields may be undergoing a partial return to the higher-yielding normality of the 1980s and 1990s, driven increasingly by stronger growth rather than oil prices.

• Between 4 August and 1 October, the 10-year US Treasury yield rose by more than 60 basis points, while the non-technology sectors of the MSCI All Country World Index fell 8% and technology gained 9%.
• Oil’s influence has weakened: Brent peaked near $109 before falling to $96, yet Treasury yields still increased by 25 basis points as oil prices declined.
• Stronger US data drove the latest yield increase, with second-quarter GDP revised from 1.5% to 2.2%; nominal GDP growth reached 6.3%, and the Atlanta Fed’s third-quarter GDPNow forecast was similar.
• With inflation still above target, stronger growth raises the risk of overheating and of more Federal Reserve rate hikes than markets currently price; yields above 5% may therefore be more likely than yields below 5%.
• The historical comparison is imperfect: US government debt averaged 44% of GDP in the 1980s and 1990s versus 110% today, although interest costs as a share of the budget remain below the roughly 20% level seen then.

Takeaway: A further rise in yields could be difficult for some markets, including high-yield credit, but may represent a manageable normalisation rather than a repeat of the 2022 shock; oil remains a major upside risk, with prices potentially falling toward $70 if flows normalise or rising sharply if tensions around the Strait of Hormuz worsen.