A Summer of Rising Yields?

On July 20, the “King of the North” has successfully rode south to enter 10 Downing Street, the political centre of the country, unopposed.

As the seventh prime minister in a decade, Andy Burnham inherits a fast-paced environment where short termism rules. Results have to be seen quickly. Speaking outside the official residence on Day 1 of his premiership, PM Burnham announced a new ’10-year plan’ for the country.

The problem is, few know what this plan entails. “Labour,” observed one FT writer (£), “has handed Burnham a blank cheque.”

PM did, however, sketched out some broad objectives in his short speech, including:

• ‘some help with the cost of living’
• ‘build more council homes’
• ‘fair and sustainable way to bring welfare bill down’ and
• ‘honour our commitments on defence to our international partners.’

But in the end, we can only wait and see how these goals can be achieved. The devil, they say, is in the details.

The market is not deeply impressed by all this political event.

Gilt yields climbed on the day PM Burnham took office. The 10-year yield, for example, edged above the 5 percent mark once more and closed at 5.045%.

Chartwise, this is a dangerous level to cross at as the jump affirms the multi-year upward cycle (see below). Even a layman can see where this rate is heading: Up.

Political worries aside, gilt bears are eyeing crude prices anxiously.

The US-Iran conflict has flared up once more, thus shutting down the Strait of Hormuz. As a result, crude prices have rebounded mightily. From the sixties, crude now trades above $80 a barrel (see below).

The problem this time round is that oil inventories are depressingly low. The conflict has lasted more than three months. Many countries have dipped into their oil strategic reserves to cap domestic price increases.

Even the US is showing a big decline in its Strategic Petroleum Reserve. The latest EIA report, released on July 10, shows a staggering 21% drop in SPR over 12 months. The reserve level has plunged from 402 to 316 million barrels of oil – the lowest reserve in forty years.

Moreover, the rebound in oil prices is bringing renewed complications in the fight against inflation. Central banks will come under increasing pressure to hike policy rates in order to temper price increases, especially if this second round of oil price increase were to last throughout summer.

Not only UK long yields are heading higher. In the US, the 10-year Treasury yield is also steadily climbing towards the range high near 4.8%.

Few in the market are certain which direction will the new Fed chair Walsh will take. He is maintaining a tight communication on new Fed policies.

The Eurozone is too experiencing a tightening bond market. The EU 10-year yield, for example, recently rebounded sharply (along with oil prices) above 3%. Another gentle push from here will tip the rate into a new, multi-year high.

Psychologically this will cause investors to turn more bearish on the asset (bond yield and prices move inversely).

As for Japan, the yield situation there is much more dramatic.

Since hiking the policy rate 5 times from mid-2024 onwards – thus ending the country’s decades-long quantitative easing – JGB yields have been climbing nonstop. The 10-year JGB yield is now aiming to breach that 3% level (see below). This is a new economic paradigm for Japan.

Technically, however, the trend here seems a little stretched and susceptible to a pullback. What may cause investors to flock to JGBs? Market volatility and turmoil in the stock market. Only then will investor value safety over returns.

However, for the second-largest economy in the world – China – the yield there is behaving in a completely opposite manner.

Chinese yields have plummeted in recent years due to persistent deflation. The Chinese 10-year yield, for example, has halved since 2020 (see below). This is making its industrial goods extremely price competitive. Unsurprisingly the country’s export surplus reached a massive $1.2 trillion in 2025.

But the downtrend there is showing some signs of stabilising. No new lows in a year, suggesting waning downward momentum.

Summary

Higher borrowing costs are a drag on economic activities. More importantly, the base level matters. Increasing interest rates from 5% will carry much more financial burden than an equivalent rise from 1%.

Many western economies are on the cusp of another jump in bond yields. This will be problematic for asset prices since higher borrowing costs are making leveraged speculation, mortgages and corporate refinancing more costly.

SpaceX (SPCE), for example, saw its share price collapse by almost 50% since its much-hyped IPO.

Prices have cut through the listing price at $135 with ease and are now heading towards the psychological support near $100. Losing more than $1 trillion in market value brings financial pain to many shareholders who bought near the peak.

Even the AI/Memory sector is showing signs of a retrenchment. The sector, as proxied by the Roundhill Memory ETF (DRAM), lost a third of its value after tripling during Mar-June (see below).

In other words, the slowly rising bond yields is dampening the stock party. Equities that have rocketed in the past year are most vulnerable. Should the Iran conflict persist, higher inflationary pressure will dramatically increase economic and financial volatilities.

Summer is about to begin in earnest. Let’s just hope it doesn’t become a summer of yield discontent.