The Eccles Building, home of the Board of Governors of the Federal Reserve System and the Federal Open Market Committee.
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A selloff in global bond markets is accelerating, fueling concerns about sovereign 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 10-year treasury 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 Great Britain, 30-year gilding offerings float on their the highest level since 1998and the 10-year yield recently reached levels not seen since 2008.
Japan, which sought to normalize its monetary policy after ending the negative interest rate regime early last year, experienced yield on 10-year government bonds rose over 1%, reaching the highest level in 13 years on Tuesday, LSEG data show.
In Asia-Pacific, Indian 10-year bond yields rose by the most in more than a month on Monday and are near two-month highs 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 is in decline even though the authorities have tried to moderate growth. China’s 10-year bond yield fell to a record low this month, prompting the country’s central bank to last Friday suspended the purchase of government bonds.
What’s going on?
Bonds were rocked by the factor rally, market watchers told CNBC.
Investors are now expecting fewer rate cuts from the Fed than they did in the past and are seeking adequate compensation for the risk of holding bonds that mature far into the future as they worry about large government budget deficits.
Last monthThe Federal Reserve forecast just two rate cuts in 2025, after previously indicating twice as many cuts. AND warmer than expected US jobs report 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, which means the Federal Reserve has little or no room to cut interest rates, and the bond market is reflecting that, said Ben Emons, founder of FedWatch Advisors.
Bond yields tend to rise when interest rates rise. Bond yields and prices move in opposite directions.
Bond investors are sending a clarion call to the world’s fiscal authorities to take control of their budget trajectories.
The odds of just one cut this year rose after the jobs report, according to CME Group’s FedWatch gauge.
“After [last week’s] jobs report, we just estimate somewhere between one or two rate cuts,” said Steve Sosnick, chief strategist at Interactive Brokers.
Additionally, increased government deficits are also contributing to the bond selloff as more debt comes to market.
US government it reportedly posted a deficit of $129 billion in December52% more compared to the year before. UK public sector net debt — excluding public sector banks — amounts to over 98% of GDP.
UK gilt markets are selling off even more for a similar combination of reasons, said CreditSights senior strategist Zachary Griffiths. “Primarily [it’s because of the] uneasiness about the fiscal situation, but the fall in sterling is also fueling inflation concerns,” he added.
A ‘clarity call’ for governments
The implications of higher yields for governments and corporations are relatively simple, Sosnick said: “They’re not good!”
Higher yields increase the amount of money needed to service debt, especially for governments running persistent deficits, analysts say.
Taken to the extreme, this is where the “bond avengers” surface and demand higher rates to take on these large debts, Sosnick said.
“Bond investors are sending a clarion call to the world’s fiscal authorities to take control of their budget trajectories, lest they be exposed to additional wrath,” said Tony Crescenzi, executive vice president at Pimc.
Rising US yields are also making it difficult for some central banks to cut interest rates in the short term, HSBC chief Asia economist Frederic Neumann said on Monday, citing Bank Indonesia’s recent decision to keep interest rates on hold as one example.
US 10-year yields in the past year
A broad depreciation of Asian currencies is also expected, another HSBC analyst said. The widening gap between Asian government bond yields relative to the US is resulting in capital outflows from Asia, as well as smaller inflows from the rest of the world to Asia.
It’s not just governments that are driving bond yields higher. Borrowing costs for many companies have been compared to government bonds, and as yields on government bonds rise, so do borrowing costs for companies.
Since companies typically have to offer a higher yield than their corresponding government bonds to attract investors, the burden on them is likely to be higher.
Potential consequences include lower profits or missed opportunities, Sosnick said, pointing to corporate bonds that generally have to offer higher rates than government debt.
Rising yields tighten borrowing costs, the dollar strengthens and stocks tend to fall, affecting consumer confidence, which then has a ripple effect on real estate and retail spending, said Emons of FedWatch Advisors.
Bond buying ‘strike’
Market participants are now awaiting the inauguration of US President Donald Trump next week.
The “real test” comes when Trump takes office next week when a major wave of executive orders on tariffs and immigration restrictions is expected, industry watchers told CNBC.
Bond markets are currently witnessing a bit of a “buyers’ strike,” noted Dan Tobon, head of G10 FX strategy at Citi.
“Because why make sure now, when you’re going to have a lot more information in just a few weeks? And so that buyer strike means that yields just continue to rise quite aggressively,” he said.
“If it is seen as inflationary or has negative implications for the budget deficit, the run is likely to continue,” he added. Conversely, if policies are relatively modest, bonds could stabilize or even reverse, he said.
