A selloff in global government bonds caused U.S. 30-year Treasury yields to briefly reach 5% and German 10-year yields to hit 3%. This could lead to a global slowdown and negatively impact stocks and corporate bonds. However, bond yields later retreated, but the expectation of higher interest rates to control inflation has become more apparent due to strong U.S. economic data, a reversal of traders’ positions, and increased bond supply.
The U.S. Treasury market has experienced a significant increase in 10-year yields, rising 20 basis points to 4.8% this week alone. Yields have risen nearly 100 basis points this year and over 200 basis points in 2022. Many asset managers who had anticipated a bond rally are now abandoning their bond holdings.
The sell-off in Treasuries is driven by incorrect market positioning, as many believed that the Federal Reserve’s rate hikes signaled a good time to buy government bonds. However, this momentum behind the sell-off is causing concern.
The 30-year U.S. yields briefly reached 5% for the first time since the global financial crisis, and Germany’s 10-year Bund yield hit 3%, a significant milestone considering yields were negative earlier this year. U.S. 30-year yields later retreated to 4.86% after the ADP National Employment Report showed weaker-than-expected private payroll growth in September.
Australian and Canadian 10-year bond yields have also surged this week, and British 30-year government bond yields reached a 25-year high above 5%. The MOVE bond volatility index, a measure of investor nervousness, is at a four-month high.
The increase in bond supply, as governments sell more debt to fund budget deficits and reduce their bond holdings, is also impacting prices. Additionally, concerns over U.S. political governance, such as the recent ousting of Republican Speaker Kevin McCarthy, contribute to the uncertainty in the market.
The bond rout has sparked alarm in equity markets and led to a stronger dollar against the euro, pound, and yen. World stocks hit their lowest point since April, and the cost of insuring exposure to European corporate junk bonds reached a five-month high.
While the S&P 500 saw a slight increase in early Wednesday trade, many investors are cautious about risky assets. Equities and corporate credit are vulnerable to a potential recession caused by central bank rate hikes or a scenario where interest rates remain high for an extended period.
The surge in borrowing costs poses challenges for central banks as they balance the need to contain inflation with a deteriorating economic outlook. Uncertainty about when and how this deterioration will occur further complicates bond markets and contributes to the sell-off in longer-dated bonds.
The 10-year U.S. term premium, a measure of the compensation investors demand for lending money for the longer term, has turned positive for the first time since June 2021. It has risen over 70 basis points since the end of August.
Investors are wary of locking up their money in longer-dated government bonds due to the absence of a predicted recession, rising oil prices, and the outlook for policy rates. They are demanding compensation for the risks associated with longer-dated bonds.
In conclusion, the sustained selloff in global government bonds has led to significant increases in U.S. and German yields. This has raised concerns about a global slowdown and its impact on stocks and corporate bonds. The market positioning and expectations of higher interest rates have contributed to the bond rout. Central banks face challenges in balancing inflation containment with a deteriorating economic outlook. Uncertainty and investor caution further complicate bond markets.
