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A sell-off in global bond markets is accelerating, fueling concerns about government finances and raising the specter of higher borrowing costs for consumers and businesses around the world.
Bond yields have mainly increased globally with the US 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 could cut interest rates.
In the United Kingdom, the 30 year old gold yields are around highest level since 1998and the country’s 10-year bond yield recently reached levels not seen since 2008.
Japan, which has struggled to normalize its monetary policy after ending its negative interest rate regime early last year, has seen the yield on its 10-year government bonds will rise more than 1%, hitting its highest level in 13 years on Tuesday, LSEG data showed.
In Asia-Pacific, India’s 10-year bond yields rose the most in more than a month on Monday and are near two-month highs of 6.846%. Benchmark 10-year New Zealand and Australian government bond yields were also near two-month highs.
The only exception? Porcelain. The country’s bond market has been rising even as authorities have 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 suspend its purchases of government bonds last Friday.
What is happening?
Bonds have been shaken by a confluence of factors, market watchers told CNBC.
Investors now anticipate fewer rate cuts from the Federal Reserve than before and demand adequate compensation for the risk of holding bonds maturing in the future as they worry about large government budget deficits.
last monthThe Federal Reserve projected just two rate cuts in 2025, having previously indicated twice as many reductions. TO US employment report more positive than expected Friday has made the Federal Reserve’s rate cut path more uncertain, analysts said. Nonfarm payrolls increased by 256,000 in December, surpassing 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 the Federal Reserve has less or no room to cut interest rates, and the bond market is reflecting that, said Ben Emons, founder of FedWatch Advisors.
Bond yields typically rise when interest rates rise. Bond yields and prices move in opposite directions.
Bond investors are sending a wake-up call to the world’s fiscal authorities to rein in their budget paths.
Chances of a single cut this year increased after the jobs report, according to the CME Group FedWatch Indicator.
“After (last week’s) jobs report we’re only pricing in one to two rate cuts,” said Steve Sosnick, chief strategist at Interactive Brokers.
Additionally, high government deficits are also contributing to bond sell-offs as greater supply of debt hits the market.
The US government Reportedly ran a $129 billion deficit in December52% more than a year ago. UK public sector net debt (excluding public sector banks) accounts for more than 98% of its GDP.
UK bond markets are selling off further for a similar combination of reasons, said CreditSights senior strategist Zachary Griffiths. “Mainly (this is due to) concerns around the fiscal situation, but the fall in sterling is also fueling concerns about inflation,” he added.
A ‘wake-up 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 spend on debt service, especially for governments running persistent deficits, analysts said.
Taken to the extreme, this is where “bond vigilantes” emerge and demand higher rates to take on these large debts, Sosnick said.
“Bond investors are sending a wake-up call to the world’s fiscal authorities to rein in their budget paths, lest they be the target of additional wrath,” said Tony Crescenzi, executive vice president at Pimco.
Rising U.S. yields are also making it harder for some central banks to deliver rate cuts in the near term, HSBC’s chief Asia economist Frederic Neumann said on Monday, citing Bank Indonesia’s recent decision to keep interest rates on hold as an example. unchanged interest.
US 10-year bond yields over the past year
A broad depreciation is also expected in Asian currencies, another HSBC analyst said. The widening gap between government bond yields in Asia relative to the US is leading to capital outflows from Asia, as well as lower capital inflows from the rest of the world to Asia.
It’s not just governments that are affected by higher bond yields. Borrowing costs for many companies are comparable to government bonds, and as government bond yields rise, so do borrowing costs for companies.
Since companies often have to offer a higher yield than corresponding government bonds to attract investors, the burden on them is likely to be greater.
Possible ramifications include lower profits or missed opportunities, Sosnick said, pointing to corporate bonds that generally have to offer higher rates than government debt.
Rising yields lower borrowing costs, the dollar strengthens and stocks tend to fall, affecting consumer confidence, which then has a ripple effect in terms of housing 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” will come once Trump takes office next week, when a huge wave of executive orders on tariffs and immigration restrictions is expected, industry observers told CNBC.
Bond markets are seeing something of a “buyers’ strike” right now, observed Dan Tobon, head of G10 currency strategy at Citi.
“Why take a leap of faith right now, when you’re going to have a lot more information in just a couple of weeks? And then that buyer strike means that yields continue to rise quite aggressively,” he said.
“If they are perceived to be inflationary or have negative ramifications for the budget deficit, then the defeat is likely to continue,” he added. Conversely, if policies are relatively modest, bonds could stabilize or even reverse, he said.
