The global bond market is in a period of high volatility and government bond yields remain stubbornly high as government bond yields in the United States, Japan and several major European countries accelerate to multi-year highs. The combination of rising borrowing costs from major economies has triggered anxiety among investors about inflation, government debt, fiscal spending and the future of monetary policy.
The latest market moves have been particularly notable because several of the new yield highs have occurred during the same week. Rather than being isolated to one economy, the pressure is emerging in other big developed markets and is a big question in terms of whether global fixed-income markets are going to become more challenging.
The 2-year Treasury yield was at 4.38 percent, its highest level in about 19 months in the United States. The 5-year yield was at 4.53 percent and the 10-year Treasury yield reached around 4.79 percent, which hadn’t been seen in about 20 months.
The US Treasury yields are important because American government bonds are the bellwether for global borrowing costs. Higher Treasury yields can impact mortgage rates, corporate borrowing costs, emerging-market financing conditions and valuations in global financial markets.
Japan is also a major concern for bond investors. The 2-year government bond yield in Japan has reached 1.81% and the 5-year yield has risen to 2.26%. Japan’s 10-year yield has risen to 3%, and the 20-year yield is around 3.90%.
The rise in Japanese yields is particularly significant given the country's long history of exceptionally low interest rates. Japanese government bonds have historically been associated with very low yields and the recent rise is a significant change in global fixed-income conditions.
European bond markets are also under a great deal of pressure. Germany's 10-year government bond yield hit a 15-year high of 3.36 percent. France's 10-year yield reached 4.22 percent and Italy's 10-year yield reached 4.21 percent, and Portugal's 10-year yield was about 3.71 percent, all of them at multi-year highs.
The fact that yields are increasing at the same time in these countries indicates many interconnected factors. Inflation risks that remain, expectations about central-bank interest rates, higher government borrowing needs and concern about fiscal sustainability all contribute to higher bond yields.
Why Rising Bond Yields Matter
Bond prices and yields move in the opposite direction. When investors sell government bonds, their prices fall and yields increase. A broad selloff can therefore raise financing costs for governments while affecting companies, households and financial institutions.
Higher government bond yields also affect the value of different asset classes. If money is in government bonds then investors would demand higher returns from stocks and other riskier investments.
For governments, the question can become more complex over time. Higher yields mean that new debt and refinanced borrowing can become more expensive. Countries with large debt burdens may thus have to pay increased interest expenses if high yields are sustained.
But to refer to this era in finance as another 2008-style crisis would be premature. The global financial crisis was driven by a particular combination of housing-market weakness, excessive leverage, structured financial products and severe stress in the banking system. Today's bond market pressures have different underpinnings and should not be treated as a repeat of 2008.
That does not mean the current developments are insignificant. A synchronized growth of borrowing costs in major economies will tighten financial terms worldwide and present challenges to governments, businesses and investors.
The situation will ultimately come down to the inflation rate and central banks’ responses to it and if economic growth can sustain higher financing costs.
The bond market movements in the past week illustrate the need for investors to monitor interest rates, inflation and government debt issuance and central bank policy. The sharp jump in yields from countries around the world suggests the world fixed-income landscape is undergoing a major repricing.
The question now is whether that increase in yields is a temporary one or the start of a long-term rise in the global cost of debt. If yields remain high, the consequences beyond the bond market will impact the currencies, equity markets, credit markets, commodities and global economy.
So far, the lesson from the bond market is clear: the era of ultra-low borrowing costs is facing new challenges in global bond markets, and investors are now being forced to be more reluctant to take the risk of inflation, debt and interest rates to a new level of risk from inflation, debt and interest rates.
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