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A selloff in global bond markets is accelerating, fueling concerns about public finances and raising the specter of higher borrowing costs for consumers and businesses around the world.
Bond yields are mostly rising globally with the US as the main source 10-year treasury the yield hit a new 14-month high of 4.799% on Monday as investors reassess the pace at which the Federal Reserve may cut interest rates.
In the UK, 30-year gilding productivity fluctuates on its own the highest level since 1998and the country’s 10-year yield recently hit a level not seen since 2008.
Japan, which has sought to normalize monetary policy since ending negative interest rate regime early last year, has seen yield on 10-year government bonds rose more than 1% to hit a 13-year high on Tuesday, LSEG data showed.
In the Asia-Pacific region, India’s 10-year bond yield rose by the most in a month on Monday, near a 2-month high of 6.846%. Yields on benchmark 10-year New Zealand and Australian government bonds were also near two-month highs.
The only exception? China. The country’s bond market was on a tear even as authorities tried to cool the rally. China’s 10-year bond yield fell to a record low this month, prompting the country’s central bank to suspended the purchase of government bonds last Friday.
What is happening?
Market watchers told CNBC.
Investors are now expecting fewer rate cuts from the Fed than before and are demanding adequate compensation for the risk of owning bonds that mature in the future as they worry about large government budget deficits.
Last monthThe Federal Reserve forecast just two rate cuts in 2025, after previously pointing to twice as many cuts. A US jobs report is hotter than expected on Friday made the Fed’s rate cut path more uncertain, analysts said. Nonfarm payrolls rose 256,000 in December, beating the 212,000 added in November and beating the Dow Jones consensus forecast of 155,000.
The U.S. economy is strengthening faster than expected, meaning there is little or no room for the Federal Reserve to cut interest rates, and the bond market is reflecting that, said Ben Emmons, founder of FedWatch Advisors.
Bond yields generally rise when interest rates rise. Bond yields and prices move in opposite directions.
Bond investors are making a clarion call for global fiscal authorities to gain control over their fiscal trajectories.
The likelihood of just one cut this year increased after the jobs report CME Group FedWatch gauge.
“After (last week’s) jobs report, we only estimate one or two rate cuts,” said Steve Sasnick, chief strategist at Interactive Brokers.
In addition, increased government deficits are also fueling the bond sell-off as an increasing supply of debt enters the market.
US Govt reported a deficit of $129 billion in December52% more than a year ago. UK public sector net debt — excluding public sector banks — is more than 98% of GDP.
British gilts are selling off further for a similar combination of reasons, said CreditSights senior strategist Zachary Griffiths. “Primarily (this is due to) anxiety over the financial situation, but the fall in sterling is also fueling inflation concerns,” he added.
“Good call” for governments
The implications of increased profitability for governments and corporations are relatively simple, Sosnik said: “They’re not good!”
Higher yields increase the amount of money that needs to be spent on debt service, especially for governments with persistent deficits, analysts said.
Taken to an extreme, that’s where the “bond bullies” come in and demand higher rates to take on those big debts, Sosnik said.
“Bond investors are sending a clarion call to global fiscal authorities to monitor their fiscal trajectories to avoid further wrath,” said Tony Crescenzi, executive vice president of Pimco.
Rising US yields are also making it harder for some central banks to cut rates in the near term, HSBC chief Asia economist Frederic Neumann said on Monday, citing Bank Indonesia’s recent decision to keep interest rates on hold.
The 10-year US Treasury yield last year
Asian currencies are also expected to fall broadly, another HSBC analyst said. The widening gap between Asian and US government bond yields is leading to capital outflows from Asia and reduced inflows from the rest of the world to Asia.
Higher bond yields aren’t just affecting governments. The cost of borrowing for many businesses equates to government bonds, and as government bond yields rise, so do borrowing costs for companies.
Because companies typically have to offer higher yields than their respective government bonds to attract investors, the burden on them is likely to be greater.
Potential consequences include lower profits or lost opportunities, Sosnik said, pointing to corporate bonds, which typically have to offer higher rates than government debt.
Rising yields are driving down borrowing costs, the dollar is strengthening and stocks are trending lower, affecting consumer confidence, which then has a ripple effect in terms of housing and retail spending, said Emmons of FedWatch Advisors.
Bond buying strike
Market participants are now awaiting the inauguration of US President Donald Trump next week.
The “real test” will come when Trump takes office next week, with a wave of executive orders on tariffs and immigration restrictions expected, industry watchers told CNBC.
Bond markets are currently experiencing a bit of a “buyers’ strike,” noted Dan Tobon, head of G10 FX strategy at Citi.
“Because why believe right now when you’re going to get a lot more information in just a couple of weeks? And so the buyers’ strike means that profitability continues to grow quite aggressively,” he said.
“If they are perceived as inflationary or negative for the budget deficit, then the rout is likely to continue,” he added. Conversely, if policy is relatively dovish, bonds could stabilize or even be canceled, he said.
