Eccles Building, home to the Board of Governors of the Federal Reserve System and the Federal Open Market Committee.
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A sell-off in global bond markets is accelerating, fueling worries about government finances and raising concerns about rising borrowing costs for consumers and businesses around the world.
Global bond yields mostly rose as investors reassessed the pace of potential rate cuts by the Federal Reserve, with the U.S. 10-year Treasury yield hitting a 14-month high of 4.799% on Monday.
In the UK, 30-year bond yields are hovering at their highest levels since 1998, and the country’s 10-year bond yield recently hit its highest level since 2008.
Data from the London Stock Exchange shows that Japan has been working hard to normalize monetary policy after ending the negative interest rate system early last year. The 10-year government bond yield has risen by more than 1%, hitting the highest level in 13 years on Tuesday.
In the Asia-Pacific region, India’s 10-year government bond yield rose the most in more than a month on Monday, approaching a two-month high of 6.846%. Yields on benchmark 10-year New Zealand and Australian government bonds are also near two-month highs.
The only exception? China. The country’s bond market has been rising sharply despite attempts by authorities to cool the rally. China’s 10-year government bond yield fell to a record low this month, prompting the country’s central bank to suspend purchases of government bonds on Friday.
What’s going on?
Market observers told CNBC that bonds are being affected by a combination of factors.
Investors now expect the Fed to cut interest rates by fewer margins than before, and are demanding full compensation for the risks of holding bonds well into the future amid concerns about huge government budget deficits.
Ben Emons, founder of FedWatch Advisors, said that the U.S. economy is strengthening faster than expected, which means the Federal Reserve has less or no room to cut interest rates, and the bond market has also reflected this.
When interest rates rise, bond yields typically rise. Bond yields and prices move in opposite directions.
Bond investors are calling on the world’s fiscal authorities to rein in budget trajectories.
Odds increase for just one rate cut this year, according to jobs report CME’s FedWatch Indicators.
“After (last week’s) jobs report, we were only expecting one or two rate cuts,” said Steve Sosnick, chief strategist at Interactive Brokers.
Additionally, rising government deficits have also led to bond sell-offs as more debt supply enters the market.
us government December deficit reportedly hit $129 billion52% higher than a year ago. UK public sector net debt — excluding public sector banks — accounts for more than 98% of GDP.
Zachary Griffiths, senior strategist at CreditSights, said there was even more selling in the UK gilt market for a similar combination of reasons. “Mainly it’s because of financial uneasiness, but the fall in sterling also raises inflation concerns,” he added.
A “clarion call” to the government
Sosnick said the impact of high yields on governments and businesses is relatively simple: “They’re not good!”
Analysts say rising yields will increase the amount of money needed to service debt, especially for governments running ongoing deficits.
Sosnick said that in extreme cases, “bond vigilantes” emerge and demand higher interest rates to cover these massive debts.
“Bond investors are calling on fiscal authorities around the world to rein in budget trajectories to avoid additional wrath,” said Tony Crescenzi, executive vice president at Pimco.
Frederic Neumann, chief Asia economist at HSBC, said on Monday that rising U.S. Treasury yields are also making it more difficult for some central banks to cut interest rates in the short term, citing Bank Indonesia’s recent decision to keep interest rates unchanged as an example.
U.S. 10-year Treasury bond yields over the past year
Another HSBC analyst said Asian currencies were also expected to depreciate sharply. The widening gap between Asian and U.S. Treasury yields has led to capital outflows from Asia and fewer flows into Asia from the rest of the world.
It’s not just governments that are affected by rising bond yields. Many companies base their borrowing costs on government bonds. As government bond yields rise, so will their borrowing costs.
Since companies typically have to offer higher yields than corresponding government bonds to attract investors, their burden can be higher.
Potential impacts include lower profits or foregone opportunities, Sosnick said, noting that interest rates on corporate bonds are typically higher than on government bonds.
Emmons, an observer adviser to the Federal Reserve, said that rising yields lead to tighter borrowing costs, a stronger dollar, and stock markets tend to fall, affecting consumer confidence, which in turn has a knock-on effect on housing and retail spending.
Bond buying ‘strike’
Market participants are currently awaiting the inauguration of U.S. President Donald Trump next week.
Industry observers told CNBC that the “real test” will come when Trump takes office next week, when a wave of executive orders on tariffs and immigration restrictions are expected.
Dan Tobon, Citigroup’s head of G10 foreign exchange strategy, said the bond market is currently experiencing some “buyers’ strikes.”
“Because you’re going to have more information in just a few weeks, why take a leap of faith now? So a buyer strike means yields will continue to rise sharply,” he said.
“If these are seen as triggering inflation or having a negative impact on the budget deficit, the rout could continue,” he added. Conversely, if policies are relatively dovish, bonds could stabilize or even reverse, he said.
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