A sell-off in global bond markets deepened on Tuesday, with Japan's 10-year bond yield hitting 3% for the first time since 1996, the latest manifestation of trader angst about energy-driven inflation, monetary tightening and worsening fiscal conditions.
The rout took in major economies from the United States to Germany as well as Britain, where bond yields surged 10 basis points, playing catch-up with global moves after Monday's UK public holiday. Euro zone yields hit fresh over-10-year highs as the Middle East crisis stokes price pressures globally, driving market bets central banks will raise interest rates soon.
A deluge of bond sales from big tech companies aggressively raising money to fund the AI boom, in an environment where the U.S. debt load has passed $40 trillion, has exacerbated government bond selling in recent weeks. Yields rise when bond prices fall.
Governments are jittery, and last month the U.S. Treasury stepped into markets in a bid to cap a rise in borrowing costs. Still, 30-year Treasury yields have already recovered around two-thirds of their fall after that move.
And the scale of the global shift is underscored by the rise in 10-year Japanese government bond (JGB) yields to 3% for the first time in 30 years, something seen as practically unthinkable until recently after over a decade of massive central bank debt purchases kept rates artificially low. The rise in U.S. and Japanese yields reflect inflation and fiscal worries, said Tai Hui, APAC chief market strategist at J.P. Morgan Asset Management.
“The stalemate in the Middle East risks pushing energy prices higher ... meanwhile, few actions have been taken to consolidate fiscal deficits in both economies.”
Brent crude rose 2% to over $92 a barrel on Tuesday and European natural gas prices were at their highest since March, after Monday saw the first exchange of direct attacks between the U.S. and Iran in a month.
END OF ERA? DEFINITELY
For Japan in particular, higher yields increase the cost of servicing the developed world's biggest debt pile at a time when Prime Minister Sanae Takaichi is planning aggressive investment. Five-year JGB yields hit a record high 2.26% .
U.S. 10-year Treasury yields also pushed to the highest since January 2025 at around 4.79%, while the 30-year yield was at 5.27% just 6 basis points shy of levels before August's intervention. Germany's 10-year yield was at 3.35%, its highest since 2011, and France's at 4.21%, its highest since 2008, as data showed euro zone inflation rose above 3% in August, cementing bets on a September European Central Bank rate rise.
Britain's 10-year gilt yield rose to 5.25%, its highest since 2008.
Analysts noted some different forces at play as global borrowing costs rise.
"In Europe and the UK it is more because of heightened inflation expectations, while in the U.S. the upticks in long-end yields are still more driven by higher real yields although inflation expectations have been creeping up too," said Frances Cheung, OCBC's head of FX and rates strategy.
Real yields are the returns that a bond investor demands above inflation, an indicator of true borrowing costs for governments and companies. Concern that the U.S. Federal Reserve was too relaxed about inflation has also been in the mix for Treasuries.
This started to shift last week, as new Fed Chair Kevin Warsh sounded tough on inflation, sending longer-dated yields lower and shorter-dated ones higher as bets on a September Fed rate hike rose. Though this can only do so much.
"The idea... is that the hawkish pivot by Chair Warsh at Jackson Hole was going to rein in long-end yields and restore stability and inflation credibility," said Kenneth Broux, head of corporate research FX and rates at Societe Generale.
“The resumption of the conflict between the U.S. and Iran and higher energy prices has effectively killed that idea and added new bearish impetus to bonds.”
U.S. Treasury Secretary Scott Bessent shrugged off worries about the bond market in an interview with Reuters on Sunday, saying the effect of higher energy prices would fade and higher yields reflected confidence in the economy.
But as governments competing for the same broad pool of capital, higher yields in one market can push them up elsewhere.
Australian 10-year yields notched their sharpest rise in five months on Tuesday, in part due to fears higher JGB yields would mean fewer Japanese buyers of Australian debt.
Further Japanese yield rises could drive a gradual re-allocation into Japanese assets, said TD Securities senior rates strategist Prashant Newnaha.
"It's a genuine regime change. JGBs were the anchor for global fixed income for a long time," he said.
“Now it has flipped.”
Source: Reuters
– Agencies
