Article by Li Jia, Wall Street Journal
The global bond market is facing renewed selling pressure as slower-than-expected inflation retreat and elevated fiscal financing needs prompt markets to reassess interest rate trajectories, with expectations of "higher rates for longer" continuing to rise.
On Thursday, September 24, Bloomberg reported that the yield on the Bloomberg Global Aggregate Government Bond Index rose 8 basis points to 3.99% on Wednesday, nearing the 4% threshold and reaching a level rarely seen since 2007, marking its largest single-day increase since May. Meanwhile, the yield on U.S. five-year Treasuries surpassed 5% for the first time since 2007. The swap market currently prices in expectations of three 25-basis-point rate hikes over the next year, with growing expectations for a fourth hike.
The impact of the bond market sell-off is also spreading to other assets and the real economy. Financing costs for governments, corporations, and households are facing upward pressure, while higher risk-free rates increase the discount rate for risk assets such as stocks, suppressing their valuations. Meanwhile, bond market volatility has risen significantly, with the ICE Bank of America MOVE Index reaching its highest level since March on Wednesday, further increasing investor caution.
Weak demand in the five-year auction keeps U.S. Treasury yields elevated.
U.S. Treasuries have been the primary driver behind the current global bond market correction. On Thursday, U.S. Treasury yields continued to rise, with the 10-year yield climbing 2 basis points to 5.14%, reaching its highest level since 2007, while the 30-year yield hit its highest level since 2004.
The U.S. Treasury completed a $70 billion auction of five-year Treasuries on Wednesday, with the winning yield reaching the highest level since 2006. According to a metric used by Bloomberg, this auction ranked as the second-worst since records began in 2018, indicating that markets still demand additional compensation at higher yield levels. As U.S. debt approaches $40 trillion, rising interest expenses are further amplifying market concerns about fiscal sustainability.
JPMorgan and KKR strategists both expect U.S. Treasury yields to have further room to rise, viewing energy-driven inflation, substantial government borrowing, and additional central bank tightening as key drivers. Bloomberg Markets Live strategist Alyce Andres stated that investors are selling Treasuries not due to a collapse in inflation credibility, but because the real policy outlook and term premium still require greater adjustment.
Selling spreads across Asia, Japanese yields hit a 30-year high.
Bond market pressures further spread to Asian markets on Thursday. Australia’s three-year government bond yield jumped 14 basis points to 5.07%, the highest since May 2011; New Zealand’s two-year yield rose as much as 17 basis points, nearing 4%.
Japan’s market reopened after a three-day holiday and quickly caught up with the global selloff, pushing the yield on 10-year Japanese government bonds to the highest level since 1996. Carol Lye, portfolio manager at Brandywine Global Investment Management, said that domestic institutional demand for Japanese government bonds—whether from pension funds, banks, or life insurers—remains insufficient.
The global bond market's adjustment also reflects a repricing of interest rate expectations. According to Bloomberg index data, global government bonds have declined by approximately 2.4% year-to-date, compared to a 6.8% gain during the same period last year, indicating significantly increased pressure on the bond market.
High inflation and strong fiscal demand support high yields, as investors await a cooldown in volatility.
The report cites market participants who believe this round of bond selling has solid fundamental support. Amy Xie Patrick, a fund manager at Pendal Group, stated that inflation remains high and persistent across multiple economies, labor markets stay tight, and the economy continues to grow strongly despite rising fuel and commodity prices—conditions under which bond performance aligns with current economic fundamentals.
Amid ongoing selling pressure, investor strategies have diverged. Damien Loh, Chief Investment Officer at Ericsenz Capital, believes that short-term bond valuations have become cheap, but he does not recommend immediately going against the trend; for investors seeking opportunities in the sell-off, he favors steepening yield curve trades, such as 2-year/10-year or 5-year/30-year spread strategies, as they offer a more favorable risk-reward profile.
TD Securities strategist Hans Mikkelsen noted that the current contradiction in the fixed income market is that investors seek higher yields but do not want yields to continue rising rapidly. “They’re afraid of catching a falling knife.” Rising bond market volatility has become the primary obstacle deterring potential buyers from entering the market.