The Eccles Building, home of the Board of Governors of the Federal Reserve System and the Federal Open Market Committee.
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The sell-off in global bond markets is accelerating, raising concerns about government finances and raising the specter of higher borrowing costs for consumers and businesses around the world.
Bond yields were mostly rising globally along with the United States Treasury for 10 years The yield hit a 14-month high of 4.799% on Monday, as investors reassess the pace at which the Federal Reserve might cut interest rates.
in the united kingdom, 30 gilded years Returns are soaring Highest level since 1998The country's 10-year bond yield recently reached levels not seen since 2008.
This has seen Japan, which is striving to normalize its monetary policy after ending its negative interest rate regime early last year 10-year government bond yield London Stock Exchange data showed that shares rose more than 1 percent, hitting their highest levels in 13 years on Tuesday.
In the Asia-Pacific region, Indian 10-year bond yields rose the most in more than a month on Monday and are approaching a two-month high of 6.846%. Yields on 10-year New Zealand and Australian government bonds are also close to their highest levels in two months.
The only exception? China. The country's bond market was on a tear even as authorities sought to cool the rally. The yield on Chinese 10-year bonds fell to a record low this month, prompting the Chinese central bank to take a decision. The purchase of government bonds was suspended last Friday.
What's going on here?
Market watchers told CNBC that the bonds were affected by a range of factors.
Investors now expect fewer interest rate cuts by the Fed than they did previously, and are demanding that they be adequately compensated for the risks of holding bonds that mature in the future because of their concern about the government's huge budget deficit.
last monthThe Fed expects to cut interest rates only twice in 2025, after previously signaling weak cuts. A The US jobs report is hotter than expected Analysts said Friday made the path of the Fed's interest rate cuts more uncertain. Nonfarm payrolls rose by 256,000 in December, topping the 212,000 added in November and beating the Dow Jones forecast of 155,000.
The U.S. economy is strengthening faster than expected, which means the Federal Reserve has no room to cut interest rates, or the bond market is reflecting that, said Ben Emmons, founder of FedWatch Advisors.
Bond yields usually rise when interest rates rise. Bond yields and prices move in opposite directions.
Bond investors are making a clear appeal to the world's financial authorities to control the paths of their balance sheets.
The chances of making just one cut this year increased after the jobs report, according to the jobs report CME Group's FedWatch metric.
“After (last week's) employment report, we're only pricing in one or two rate cuts,” said Steve Sosnick, chief strategist at Interactive Brokers.
In addition, high government deficits also contribute to bond sell-offs as more debt hits the market.
US government It reportedly posted a deficit of $129 billion in DecemberAn increase of 52% compared to last year. Net public sector debt in the UK – excluding public sector banks – amounts to more than 98% of its GDP.
British bond markets are seeing a bigger sell-off for a similar set of reasons, said Zachary Griffiths, chief strategist at CreditSights. “This is primarily due to unease about the financial situation, but the decline in sterling also raises inflation concerns,” he added.
A “clear call” to governments
Sosnick said the implications of higher yields for governments and companies are relatively simple: “It's not good!”
Analysts said that high yields increase the amount of money needed to spend on debt service, especially in the case of governments that suffer from persistent deficits.
This is where “bond vigilantes” emerge and demand higher rates to take on these large debts, Sosnick said.
“Bond investors are sending a clarion call to the world’s financial authorities to take control of their balance sheet paths, lest they incur additional wrath,” said Tony Crescenzi, executive vice president at Pimco.
High US yields make it difficult for some central banks to implement interest rate cuts in the near term, Frederic Neumann, chief Asia economist at HSBC, said on Monday, citing the Bank of Indonesia's recent decision to keep interest rates unchanged as an example.
US 10-year returns last year
Another HSBC analyst said a widespread decline in the value of Asian currencies is also expected. The widening gap between government bond yields in Asia relative to the United States is leading to capital outflows from Asia, as well as lower flows from the rest of the world to Asia.
It's not just governments that are affected by rising bond yields. Borrowing costs for many companies are comparable to government bonds, and as government bond yields rise, so do corporate borrowing costs.
Since companies typically have to offer a higher yield than corresponding government bonds to attract investors, the burden on them is likely to be higher.
Possible repercussions include lower profits or lost opportunities, Sosnick said, pointing to corporate bonds that generally have to offer higher interest rates than government debt.
Higher yields drive down borrowing costs, strengthen the dollar and stocks tend to fall, affecting consumer confidence which then has a ripple effect in terms of housing and retail spending, said Emmons of FedWatch Advisors.
Bond purchase strike
Market participants are now awaiting the inauguration of US President Donald Trump next week.
Industry watchers told CNBC that the “real test” comes once Trump takes office next week, when a major wave of executive orders on tariffs and immigration restrictions is expected.
Bond markets are experiencing something of a “buyers strike” at the moment, notes Dan Tobon, head of G10 FX strategy at Citi.
He added: “Why take a leap of faith now, when you have so much information in just two weeks? So the buyers' strike means that yields will continue to rise very strongly.”
He added: “If we view these issues as inflationary or having negative repercussions on the budget deficit, this deterioration is likely to continue.” Conversely, if policies are relatively modest, bonds may stabilize or even reverse.
