Morning Bid: Storm brewing

As the US third-quarter earnings season commences, both the S&P 500 and Nasdaq achieved a new record high on Tuesday, marking their first such milestone in over six weeks. Analysts forecast a surge in profits, driven by artificial intelligence, with an expected 30% annual expansion according to LSEG data. Treasury yields remain near 24-year peaks, complicating bond markets' upcoming week of US debt sales.

The 3-year note auction on Tuesday proceeded smoothly, unlike last month's challenging 5-year sale, but the rates offered were the highest in 20 years. Additional sales of 10-year and 30-year bonds are scheduled for today and tomorrow, respectively. While the Federal Reserve's rising interest rate expectations have primarily driven this yield increase, concerns about holding long-term debt persist and are on the rise.

The New York Fed's estimate of the 10-year Treasury term premium has hit its highest in 12 years, currently at 96 basis points. The Federal Reserve's decision to raise rates for the first time in three years will be revealed in minutes from their September meeting on Wednesday. Meanwhile, the Atlanta Fed's GDPNow model has slightly softened to 3.7% from a peak of 5.1%, possibly due to mechanical GDP impacts from a growing trade deficit in August.

In Europe, European government debt markets softened on Tuesday, with French debt risk premia versus Germany remaining at their widest in 15 years, reflecting ongoing struggles to pass a budget that would curb its annual deficit above 5% of GDP. The widening of French debt spreads and increasing borrowing costs have had a ripple effect across euro zone government debt markets, potentially reigniting the 2010-2012 euro debt crisis.

The spillover effects were felt most acutely in Belgian, Italian, and Greek debt markets. The Federal Reserve will release policy meeting minutes at 2 p.m. EDT. For the latest market updates, listen to the Morning Bid daily podcast and subscribe for a daily briefing from Reuters journalists.