Global Bond Markets in Turmoil as Yields Skyrocket to levels not seen in over a decade.

The global bond market is in the midst of a significant upheaval, with no signs of slowing down. Yields are soaring to levels not seen in over a decade, and market participants are bracing themselves for an extended period of tight monetary policy.

Key Points;

• Global bond markets are experiencing a significant upheaval, with yields surging to levels not seen in over a decade.
• Yields on 30-year US Treasuries have hit 5%, a level last witnessed in 2007, while German 10-year rates have climbed to 3%, unseen since 2011.

Yield Surge: US and German Bonds Reach Decade-High Levels

The yield on 30-year US Treasuries breached the 5% mark, a level last witnessed in 2007. Simultaneously, the German 10-year benchmark rate surged to 3%, a threshold untouched since 2011. In Japan, the 10-year overnight-indexed swaps spiked to 1%, a level not seen since January.

The driving force behind this selloff is the growing demand for higher returns from investors who invest in bonds and are holding onto long-dated debt. Major central banks have made it clear that they have no immediate plans to ease their monetary policies, which has further fueled concerns. Additionally, worries about increased Treasury issuance to cover mounting budget deficits have added to the downward pressure on longer-term securities.

Investor Concerns and Central Bank Policies

HSBC Holdings Plc strategist Steven Major noted, “US yields at highs for the year are starting to look disruptive for other regions and sectors in global fixed income.” This volatility is now spilling over into equity markets and corporate notes, with blue-chip yields reaching a high of 6.15%, causing at least two borrowers to delay their issuance. The largest speculative-grade bond ETF also experienced its biggest two-day slump this year.

The unexpected surge in job openings, which reinforced speculations of the Federal Reserve continuing to raise interest rates, accelerated the bond losses early this month. This led to the term premium on 10-year US notes turning positive for the first time since June 2021.

Global Bond Performance in 2023

In 2023 alone, global bonds have already seen a 3.5% decline, and the BofA MOVE Index for Treasuries volatility reached its highest level since May. Bonds in the US Treasury Index now trade at an average of 85.5 cents on the dollar, just half a cent above the record low in 1981.

European yields have followed the upward trajectory of their US counterparts, with a strong correlation between Bloomberg’s global securities gauge and a Treasuries index. Althea Spinozzi, senior fixed income strategist at Saxo Bank, emphasized, “US treasury and European sovereigns are correlated.” Even though Europe is experiencing a deepening recession, higher US yields are pushing European sovereign yields higher as well.

Asian emerging-market bonds have not been spared either, with the Indonesian benchmark reaching levels not seen since November. Analysts have expressed concerns, with Min Dai, head of Asia macro strategy at Morgan Stanley, stating that “Long EM duration is a pain trade for most real money investors,” and this positioning increases market vulnerability if UST rates continue to rise.

However, there is still interest in the very shortest end of the Treasury market. A recent 52-week bill sale attracted record demand from non-dealers as investors sought yields above 5% for the next year.

FAQs

What is causing the current global bond market selloff?

The selloff in the global bond market is primarily driven by concerns about an extended period of tight monetary policy and the demand for higher returns on long-dated debt. Major central banks have indicated that they are unlikely to ease their policies soon, and worries about increased Treasury issuance to cover budget deficits have also contributed to the selloff.

Why are US and European sovereign yields correlated?

US Treasury and European sovereign yields are correlated because they often move in tandem due to their interconnectedness in global financial markets. When US yields rise, they can push up yields on European sovereign bonds, despite economic conditions in Europe, due to the global nature of fixed-income markets.

How is the bond market selloff impacting emerging markets?

The bond market selloff has had a ripple effect on emerging markets, leading to higher yields on some of their bonds. This is a concern for investors, particularly those holding longer-duration emerging-market bonds, as it increases market vulnerability.

Conclusion

In conclusion, the ongoing global bond rout is creating turmoil in financial markets. Rising yields are disrupting various asset classes, leading to heightened concerns among investors. The path ahead remains uncertain, with market participants debating the potential implications of this bond market upheaval, including its impact on equities and the broader financial landscape.