A global selloff in government bonds has caused a surge in yields, with US 30-year Treasury yields reaching 5% for the first time since 2007. German 10-year yields also hit 3%, a milestone for a market that previously had negative yields in early 2022. These moves have raised concerns about a potential global economic slowdown and have the potential to harm stocks and corporate bonds. However, a calmer tone set in later on Wednesday as bond yields retreated.
The rise in bond yields has been driven by a combination of factors, including resilient US economic data, a sharp unwinding of traders’ positions, and increasing bond supply. This has created a growing sense that interest rates in major economies will remain higher for longer to combat inflation.
The US Treasury market, considered the bedrock of the global financial system, has seen 10-year yields jump 20 basis points this week alone, reaching 4.8%. Yields are up almost 100 basis points this year and over 200 basis points since 2022. This has prompted many asset managers who had expected bond prices to rally to abandon their positions.
The spike in yields has also affected other countries. Australian and Canadian 10-year bond yields have surged over 20 basis points each this week, and British 30-year government bond yields hit a fresh 25-year high above 5% on Wednesday. The increase in bond supply, as governments sell more debt to fund budget deficits, and concerns over US political governance have also contributed to the weakness in bond prices.
The rise in borrowing costs is causing alarm across equity markets, leading to the lowest world stock levels since April. The dollar has reached its highest level in months against the euro, pound, and yen as investors seek safe-haven assets. The cost of insuring exposure to European corporate junk bonds has also hit a five-month high.
The bond selloff presents a challenge for central banks, who must balance the need to keep rates high to contain inflation with a deteriorating economic outlook. Uncertainty about when and how this deterioration will occur is further complicating bond markets and contributing to the sell-off in longer-dated bonds.
Overall, investors are becoming cautious about risky assets such as equities and corporate credit, as they could be vulnerable to an eventual recession caused by central bank rate hikes or a scenario where rates remain high for an extended period. The uncertain economic outlook and rising oil prices are further adding to investors’ wariness of locking their money in longer-dated government bonds.
In conclusion, the sustained selloff in government bonds has led to a surge in yields, causing concern about a global economic slowdown and impacting stocks and corporate bonds. Factors such as resilient US economic data, unwinding of positions, and increasing bond supply have contributed to the rise in yields. This has led investors to abandon bond positions and become cautious about risky assets. Central banks now face the challenge of balancing high rates to combat inflation with a deteriorating economic outlook. Uncertainty about the future is further complicating bond markets and contributing to the sell-off in longer-dated bonds.
More detail via CNA here… ( Image via CNA )