Bond selloff deepens as oil prices and public debt fears jolt markets

Bond prices continued to slide in Asia and Europe on Wednesday, pushing borrowing costs to multi-decade highs as the Middle East conflict drives up energy prices and layers concerns about inflation on top of ‌worries about ballooning government debt.

Sovereign bond yields are a reference point for asset prices across financial markets and the higher price of money means elevated mortgage rates for consumers and tough choices for government ​spending as funding costs climb.

Japan’s 10-year yield was perched above 3% for the first time in 30 years, while rising gas prices meant German 10-year Bund yields were stuck at their highest ‌since 2011 and Britain’s equivalent was at its highest since 2008. Yields ‌rise as prices fall and vice versa.

A confluence of factors was at play, said State Street’s head of macro strategy, Michael Metcalfe, with rising energy prices causing traders to bet on rate hikes, pushing up short-dated yields.

“The narrative is also getting wrapped up with longer-term concerns about the fiscal path. In France and the UK, we are going to get news on budgets soon. So, there are not many positives out there,” Metcalfe said.

Bond sales from big tech companies aggressively ‌raising money to fund the AI boom have added pressure on the sovereign bond market, as deep-pocketed US tech firms compete with governments for investors’ capital.

Naka Matsuzawa, chief macro strategist at Nomura Securities in Tokyo, said so-called hyperscalers’ willingness to pay reasonably high rates was pulling up yields broadly, with the focus now on whether growth can rise along with them to help economies cope with the higher rates.

Yields can continue to rise as investors demand a higher premium, said Charu Chanana, chief investment strategist at Saxo.

Bonds have been under pressure since the start of the US-Israeli war on Iran but yields have hit multi-year highs in recent months on worries about rising debt loads in big economies, including the United States.

Governments are ​borrowing heavily after a jump in spending during the pandemic and Ukraine war energy crisis. They also face ageing populations, rising welfare bills, and higher defence investment needs.

Britain’s new government, led by ‌Prime Minister Andy Burnham, will present a budget in October, while France is gearing up for further battles over its next budget.

And in Japan, the bond yield surge has put the spotlight on Japanese Prime Minister Sanae Takaichi and her aggressive investment plans.

The moves have raised the spectre of “bond vigilantes”, investors who seek to impose fiscal discipline on governments by demanding sharply higher compensation to hold their bonds.

“The fear is that the bond vigilantes are on the loose and driving yields higher in protest over large government deficits,” said Ed Yardeni, president of Yardeni Research.

“We share the bond vigilantes’ concerns, but we aren’t convinced bond yields are, or will soon be, prohibitively high,” said Yardeni, who coined the term in the 1980s.

He said that if US 10-year yields hit 5%, he expected Treasury Secretary Scott Bessent to issue more shorter-dated debt to buy back longer-dated bonds to calm markets. On Wednesday, the 10-year Treasury yield was flat at 4.7961%, about 1 basis ​point off its 2025 high.

The ‌U.S. Treasury stepped into markets last month to cool long-end bond yields, though the impact was short-lived and 30-year Treasury yields are back near 19-year highs.

State Street’s Metcalfe said the selloff in bonds was “orderly”.

Nick ‌Ferres, chief investment officer of Vantage Point Asset Management in Singapore, said rates could start to cause pain for public and private borrowers, with higher yields also weighing on stock valuations.

Global stocks have broadly been supported by strong earnings, although they have weakened this week.

Higher yields can make bonds look more attractive and particularly dent the appeal of companies whose earnings potential lies far in the future, given the better return available on safe assets.

Rising energy costs continue to dog economies, ‌fueling traders’ rate-hike bets.

Brent crude oil ‌hit a one-month high on Wednesday after the US and Iran traded strikes, while European natural gas prices are at their highest since early 2023.

Federal Reserve Chair Kevin Warsh triggered a sharp rise in bets on a September rate hike with a hawkish speech last week in which he ‌acknowledged there had not been enough progress on inflation.

The rate sensitive 2-year Treasury yield was flat on Wednesday and near its 18-month high at 4.3897%.

Traders expect a European Central Bank rate increase next week and price in about a 70% chance of a Fed hike the week after.

Later this week attention will turn to the US jobs report, though the market’s focus on debt dynamics is likely to continue no matter what happened last month in nonfarm payrolls.

“Jobs data may have less impact than inflation numbers given Warsh’s assertion at Jackson Hole that price stability was the higher priority ​with sticky inflation well above target, while describing labour as stable,” said Uto Shinohara, senior investment strategist at Mesirow Currency Management.

“That said, NFP has stepped down every month since March, so a downside surprise could take some of the shine off the bump in implied Fed rates post-Jackson Hole - though the hurdle is higher with the ongoing bond selloff keeping upward pressure on yields.”

Agencies