The selloffs that keep flaring in the world’s bond markets are pushing yields toward key thresholds amid escalating worries about elevated inflation, tempestuous politics and swelling government debts.
In the US, the 10-year Treasury yield rose as high as 4.73% Wednesday, pushing it toward the 5% peak hit in October 2023, before pulling back down. In the UK, that yield hit as much as 4.82%, the highest since 2008, in an echo of the rout that ended Liz Truss’s brief stint as prime minister a little over two years ago.
Even in Japan, which had once been the world’s major holdout as central banks tightened monetary policy, the 10-year rate on government bonds has pushed over 1% to the highest in over a decade.
The movements extend what has been steadily building pressure on bonds worldwide as the US economy continues to expand at a solid pace and inflation threatens to keep interest rates elevated.
President-elect Donald Trump’s victory has only stoked the shift, with his tariff and tax-cut vows casting uncertainty over global trade and the US’s ability to keep rolling over its swelling debt without investors demanding higher payouts.
“The US market is having an outsized effect as investors grapple with sticky inflation, robust growth and the hyper-uncertainty of incoming President Trump’s agenda,” said James Athey, a portfolio manager at Marlborough Investment Management.
Concerns about the sustainability of government debt loads have risen periodically since the pandemic only to wane when other factors shifted to the forefront — and the recent move could follow that trend. On Wednesday, Treasury prices pushed slightly higher after some of those worries were quelled by signs of strong demand at a 30-year bond auction.
But the still above-target rate of inflation and drumbeat of solid economic data has dashed expectations that the Federal Reserve will cut interest rates again before the middle of this year. Minutes from the December gathering revealed that officials were eager to slow the pace of rate reductions.
Money managers are also raising fresh concerns about mounting government debts after a year of elections worldwide that shook up the status quo. In recent days, those pressures drove 30-year debt costs in the UK to the highest since 1998, reigniting questions about the government’s fiscal sustainability.
In the US, yields have risen sharply since the Fed began cutting interest rates in September, with the 10-year rate climbing more than a full percentage point. While Wednesday’s jump faded, leaving it slightly down by late afternoon in New York, the benchmark yield is still holding around the highest since April.
Targeting Next Test
Firms including Amundi SA, Citi Wealth and ING are warning of the risk that yields are likely to remain higher. Options traders are targeting 5% as the next key threshold for the 10-year Treasury. The 20-year Treasury hit that level on Wednesday and the 30-year is hovering just below it.
That shift marks another reckoning for investors who have been burned repeatedly by bets that bonds would rally once the economy finally ran out of steam. Open interest data on US 10-year note futures indicate that traders have added to bets on higher yields every day so far this year.
“Treasury yields at 5% is definitely on the cards,” said Lilian Chovin, head of asset allocation at Coutts. “There’s a risk premium, a term premium going on with the very large fiscal deficits.”
The strains have come into focus as the US government issues a whopping $119 billion worth of new debt this week. The sale of 30-year bonds on Wednesday drew the highest yield since 2007 at just over 4.9%.
Zachary Griffiths, head of investment-grade and macroeconomic strategy at CreditSights, said the auction showed signs of good demand, both in the number of bids received and the fact that the securities were sold at a yield slightly below the market rate at the time of the bidding.
“It might be enough to stop the bleeding in duration, at least briefly, as focus shifts to the nonfarm payrolls report on Friday morning,” he said.
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