Treasury: US real interest rates jump to their highest level since 2008

The rise in yields is not limited to the United States. The German 10-year Bund has risen above 3 per cent, whilst the yield on the BTp of the same maturity has climbed to 3.86 per cent, with the spread at 76 basis points. Bonds are tracking the latest rise in oil prices, which have once again begun to factor in a geopolitical premium following the resumption of hostilities between the United States and Iran.

Traffic through the Strait of Hormuz continues at a reduced rate. In the last twenty-four hours, just 34 ships are reported to have passed through, representing around 35 per cent of normal capacity. Donald Trump has announced the reinstatement of the US blockade and has demanded a refund equivalent to 20 per cent of the value of the protected cargoes. Iran has responded by asserting its control over the sea lane.

WTI jumped by around 4 per cent to around $74–75 a barrel, whilst Brent approached $80. The rise in crude oil prices is once again fuelling inflation fears. Petrol in the United States now costs around 50 per cent more than it did before the Hormuz crisis, despite oil prices still being some way off their spring peak of over $100.

The decisive moment could come today with the release of the US inflation figures for June. The market expects the headline rate to slow from 4.2% to 3.9%. On Wednesday, the producer price index will be published, which is potentially more sensitive to pressures building up further up the supply chain.

During the same period, Kevin Warsh will give his first half-yearly testimony to Congress as Chairman of the Federal Reserve. The markets will be looking for clues as to the central bank’s willingness to tolerate rising oil prices and the risk of a further rate rise. Lower-than-expected inflation could ease the pressure on Treasuries and provide support for equities. A higher reading, coupled with oil prices continuing to rise, would reinforce the most unfavourable scenario: high real yields, equity valuations under pressure and less room for manoeuvre for the Fed.

Against this backdrop, the quarterly results season is also getting underway. Analysts estimate that S&P 500 companies will see a 23 per cent rise in profits in the second quarter. With expectations this high, there is little room for disappointment.