Global bond yields have risen to multi-year highs as investors reassess the outlook for interest rates, inflation and government borrowing, with the latest move driven by a combination of higher fiscal deficits and renewed tensions in the Middle East.
Government borrowing costs have climbed across the UK, US, Germany, Australia and Japan, raising questions over whether central banks will be able to continue cutting rates or could be forced to raise them again.
The 10-year gilt yield rose to 5.23%, its highest level since 2008. The 10-year US Treasury yield moved above 4.81%, its highest level since November 2023, while Japan’s 10-year government bond yield remained above 3% after rising to a 30-year high.
The moves have come alongside a sharp rise in oil prices following renewed military hostilities between the US and Iran. Brent crude approached $97 a barrel, its highest level since late April, adding to concerns that higher energy prices could feed into inflation and limit the scope for monetary easing.
David Roberts, head of fixed income at Nedgroup Investments, said the rise in yields could create opportunities for investors who have been underweight bonds.
“Global bond yields continue to move higher. With borrowing costs at multi decade highs this could be seen as a great opportunity for investors which have been generally underweight the asset class,” he said.
Roberts said the combination of higher government borrowing and geopolitical tensions had pushed yields higher, while underlying economic conditions remained relatively benign.
“Inflation hasn’t rocketed, employment across the G7 seems at best stable,” he said, although he added that it was currently difficult to see a change in fortune for bonds.
UK launches first real-time bond market tape
For fixed-income investors, however, the increase in yields has materially improved the income available from government bonds.
Roberts said investors were now receiving higher levels of income from bonds than at almost any point this century, providing a degree of protection against further falls in capital values.
The sell-off is not confined to sovereign debt. Governments are competing with large technology companies issuing bonds to fund investment in AI infrastructure, increasing the supply of debt available to investors.
Roberts also pointed to rising government debt and fiscal deficits as a key factor behind higher borrowing costs.
Japan faces particular pressure given the size of its government debt relative to GDP. Its government is seeking to cut taxes while increasing spending to support growth, even as the Bank of Japan considers further rate rises in response to higher inflation.
The rise in yields has also fed into equity markets, with Asian and European indices coming under pressure and technology stocks among the weakest performers.
The US dollar has strengthened as markets have increased expectations of a Federal Reserve rate rise, while the yen has moved in the opposite direction as investors also anticipate further tightening from the Bank of Japan.
Roberts said the relatively modest underperformance of UK bonds suggested the latest move should be viewed primarily as a global bond-market issue rather than a UK-specific political event.
“For investors already receiving higher levels of income, the question now is whether yields have risen far enough to provide an attractive entry point, or whether fiscal and inflationary pressures will continue to push borrowing costs higher.”
Leave a comment