Global bond markets are facing a challenging situation with long-term government bond yields rising across various countries. Bond yields are rising primarily on concerns about the direction of monetary and fiscal policy in key global economies.
Bond yields fall on expectations of interest rates coming down. However, the exact opposite is happening. Globally, the bond yields are seeing a sudden rise despite the US Fed expected to cut the rate in the FOMC meeting on September 16-17.
Nigel Green, CEO of deVere Group, says, “The imbalance between supply and demand is striking. For years, pension funds and insurers were reliable buyers of long bonds, while central banks absorbed vast amounts of issuance. This period has ended. Institutions are reducing exposure to duration risk, and governments are leaning more heavily on private markets. This dynamic points to yields remaining elevated.”
Global Yields
The US 30-year Treasury yield has crossed 5% for the first time since July. Japan’s 30-year bond yield has hit a new high, up 100 basis points this year due to inflation, negative real rates, and political instability.
Similarly, UK 30-year yields are at their highest since 1998, and French 30-year debt premiums have reached 2008 levels amid political concerns over deficit reduction. Even German bunds experienced a sell-off, pushing their 30-year yield to a 14-year peak.
In an X post, Robin Brooks, Senior Fellow at Brookings Institution, previously Chief Economist at IIF and Chief FX Strategist at GoldmanSachs. “It’s really unusual for the 30-year Treasury yield to rise in a Fed easing cycle. It’s even more unusual for a 30-year yield to rise with all the world’s major central banks in an easing cycle. This tells you monetary policy isn’t the problem. Runaway fiscal deficits are the problem…”
Why are yields rising…
Investors are concerned that excessive government debt, increasing global tensions, and potential loss of central bank independence are undermining the U.S. dollar and other fiat currencies.
Donald Trump’s interference with the Federal Reserve’s independence is perceived to be the factor for the politicization of monetary policy. Recently, U.S. President Donald Trump removed Federal Reserve Governor Lisa Cook, citing alleged mortgage fraud. Trump has also been highly vocal and has been pressuring Federal Reserve Chair Jerome Powell to lower interest rates.
Many countries are facing big fiscal deficits and public debt is on the rise. The easier way out for central banks to meet a deficit is to print money. In doing so, the risk of inflation rises, and the currency depreciates. The credibility of central banks gets questioned.
When the risk of holding government bonds rises, investors ask for higher yields.
US Bond Yields
The U.S. Treasury market’s dynamics are closely connected to the global bond market, with bond yields in countries like France, Germany, the UK, and Japan rising in tandem with those in the United States.
Bond market signals indicate growing concerns about economic stability and inflation, reflected in the recent surge of gold and silver prices, amidst evolving fiscal deficits and central bank policies.