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.
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.
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?
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