Why global bond markets are selling off as US 10-year Treasury yield hits 24-year high

The 10-year US Treasury yield, which influences borrowing costs for companies and consumers, rose as high as 5.34% before easing to around 5.24%. It ended the day at its highest level since 2007

The 30-year Treasury yield also touched its highest level in 24 years before easing more than 2 basis points to 5.613%.

Bond prices and yields move in opposite directions. One basis point is equal to 0.01 percentage point. The move in the US bond market also pushed borrowing costs higher for consumers and companies in many parts of the world. 

German, French bond yields also rise 

The rise was not limited to the US. The yield on 10-year French government bonds climbed to 4.92%, its highest level since 2002. Benchmark 10-year bonds in Italy and Japan also saw their yields rise on Thursday, while bond markets in some other regions moved differently.

The 10-year German Bund yield rose 5.5 basis points to 3.633%. It remained close to the 3.653% level reached earlier this week, which was the highest since mid-2009. 

Japan’s 10-year government bond yield also reached its highest level since the mid-1990s. Japanese government bonds have faced pressure from a weaker yen and interest-rate increases by the Bank of Japan. 

Oil prices have added to concerns in bond markets. Brent crude, the international oil benchmark, remained above $100 a barrel even though more oil is now flowing from the Middle East than at any point since the war with Iran began.

Brent prices have risen around 40% since the conflict began in late February.

Higher oil prices can add to inflation in the short term. That could make it harder for central banks to cut interest rates soon.

Stocks recover after early fall

Stocks, which are sensitive to changes in interest rates and oil prices, initially fell in early trading on Thursday before recovering.

The S&P 500 ended the day 0.2% higher as the fourth quarter began.

The index had gained around 2% in the third quarter, helped by the continued rise of artificial intelligence companies. But there were also signs that higher bond yields were beginning to weigh on some parts of the stock market.

Utilities, which rely heavily on borrowing through the bond market, fell more than 13% during the quarter.

The Russell 2000, which tracks smaller US companies that are also more exposed to borrowing costs, dropped 7.2% in the third quarter. That ended a run of five straight quarters of gains.

AI boom is also pushing yields higher 

The expansion of AI is having a mixed effect on financial markets. Companies are spending heavily on data centres and other AI infrastructure. This is supporting economic growth, but investors also expect the strong growth could push the US economy towards overheating.

That could force the Federal Reserve to keep interest rates higher for longer. The increase in AI-related investment is also adding to the supply of bonds in the market, creating another factor that can push yields higher.

At the same time, the war in the Middle East continues to disrupt global oil supplies. 

Investors remain worried about government debt 

There are several other reasons behind the rise in bond yields, including renewed inflation concerns and growing worries about high government debt.

Higher yields mean governments have to spend more on interest payments on their existing debt. The pressure is particularly visible in Europe, where France is trying to pass a budget that would slightly reduce its deficit.

France has struggled repeatedly to improve its public finances. With the country’s presidential election scheduled for April, many investors are also doubtful about how quickly France can improve its fiscal position. 

French bonds have performed worse than some other European government bonds as yields have risen across the region.

The gap between the yields on 10-year French government bonds and German government bonds widened to nearly 1.3 percentage points.

German bonds are considered a benchmark safe asset in Europe. 

Meanwhile, Central banks are growing concerned that inflation could remain above their targets for too long.

The Federal Reserve, European Central Bank and Bank of Japan all raised interest rates last month. Traders expect the central banks to raise rates again this year.

The Bank of England has also indicated that it could raise interest rates.

Higher borrowing costs are now meeting high government debt levels. This is creating difficult budget decisions as governments face increasingly expensive interest payments.

Strong jobs data keeps rate worries alive

The latest economic data also showed that the US labour market remains firm.

The Labor Department said weekly initial jobless claims fell to 197,000, below the 200,000 forecast from economists polled by Reuters. It was the latest report this week to point to a solid labour market, ahead of the government’s monthly payrolls report due on Friday.

At the same time, softer-than-expected inflation data released on Wednesday reduced expectations of a rate hike at the Fed’s October meeting.

Markets were pricing in a 28.2% chance of a rate increase of at least 25 basis points, down sharply from 68.6% a week earlier, according to CME FedWatch.

Market breadth remains mixed

Despite the gains in the main indexes, the broader market remained mixed.

On the New York Stock Exchange, advancing stocks outnumbered declining stocks by a 1.234-to-1 ratio. On the Nasdaq, the ratio was 1.04-to-1.

The S&P 500 recorded four new 52-week highs and 41 new lows. The Nasdaq Composite recorded 41 new highs and 287 new lows.

Trading volume on US exchanges stood at 17.25 billion shares, slightly above the 17.19 billion average for a full session over the previous 20 trading days.

Disclaimer: This article is for informational purposes only and should not be construed as investment advice. Readers are advised to consult a financial advisor before making any investment decisions.