ECON WORLD NEWSLETTER-Yield gain, housing pain
By Carmel Crimmins
Oct 1 (Reuters) - Hi there. It’s getting hairy out there in bond markets. A global selloff in fixed income is driving benchmark 10-year US Treasury yields to their highest levels since 2002. But it’s not just the United States in investors’ crosshairs. Borrowing costs around the world are rising, with British 30-year government bond yields surging to their highest since early 1998 and Japanese yields pinned to multi-decade peaks.
Those higher borrowing costs are a big pain point for property prices. Just look at Australia. House prices Down Under are already down around 5% from their peak and some economists are forecasting a total drop of around 10%. That would be the biggest downturn in three decades but the Reserve Bank of Australia is not worried. It says even a further price fall of 20% would leave just 5% of borrowers at risk of defaulting on their loans.
That’s because property prices have surged over 60% in the past decade while the labour market has stayed resilient, helped by a boom in AI spending. But a prolonged property market downturn is filtering out to the wider economy, affecting tax revenues and consumer sentiment. I get into Australia’s property squeeze on this week’s Reuters Econ World podcast. Watch it here.
THE HEADLINES
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There are many reasons why investors are selling bonds but inflation concerns related to higher energy costs is definitely one of them. At the heart of all this is diesel. It rarely grabs the headlines like crude oil or gasoline but it is crucial for the global economy — powering agriculture and transport — and it hit a record high of $6.53 a gallon in the United States last week. That is bad news for President Trump ahead of the midterms.
Oil is flowing again from the Persian Gulf. Goldman Sachs estimates Gulf oil exports, including "dark exports" involving ships operating with their location transponders turned off, have recovered to 23.3 million barrels per day over the last week, in line with their 2025 average.
But the issue for diesel is that refining capacity has been knocked out both in the Middle East and in Russia. Ironically, the US has been a major beneficiary, stepping in to fill the gap. But that means US diesel inventories are low.
Trump last week urged Chinese President Xi Jinping to help stabilise global supplies of diesel, given that China has the world’s largest refining capacity. So far, no dice. In fact, Chinese refiners have suspended October fuel exports until further notice, sending Brent futures back over $100 a barrel. Russia, meanwhile, has extended its ban on diesel exports for fuel producers until the end of this month, adding further strain.
So Trump is turning up pressure on Europe. Reuters is reporting that the US has told Germany and France to draw down emergency diesel inventories or face a potential US diesel export ban. Trump has talked about a diesel ban before but it could backfire for him. It might initially lead to a drop in prices but fundamentally, it risks discouraging US oil refineries from making diesel, which could cause the fuel’s price to rise again. It could even hurt the supply of other fuels, like gasoline, because they are all refined from the same barrel of crude.
An export ban would also pile pressure on import-dependent economies. Mexico, Chile and Brazil are the biggest buyers of US diesel and together take more than a quarter of exports. Europe accounts for roughly another quarter and is particularly exposed because many of its cars are powered by diesel. As my colleague Ron Bousso writes, it’s a diesel dilemma.
THE CHART
US states are taking a range of steps to curb diesel and gasoline prices that have soared in recent months due to supply disruptions stemming from the US war with Iran, Ukrainian strikes on Russia's refineries, and dwindling global inventories.
THE PODCAST
"This is basically shaping up to be the worst downturn in a generation." Reuters economics and markets correspondent Stella Qiu on falling prices in Australia's property market. On this week's Reuters Econ World, we look at how higher borrowing costs are cooling one of the world's priciest property markets: Australia. Watch the show here.
THE REAL WORLD
Phoenix: Water wars come to the ballot box in Arizona
Strait of Hormuz: What war with Iran looks like from on board the USS George Washington
New York: Inside McDonald’s push to have AI price your Big Mac
THE WEEK AHEAD
Oct 2: US nonfarm payrolls
Oct 4: Brazil elections
Oct 7: Fed minutes