Rising rate hike expectations push average global government bond yields close to 4%, hitting a new high since 2007.

By Li Jia, Wall Street CN

The global bond market is facing renewed selling pressure as inflation falls slower than expected and fiscal financing demands remain elevated, prompting markets to reassess interest rate trajectories and fueling persisting expectations of rates staying "higher for longer."

On Thursday, Sept. 24, Bloomberg reported that the yield on the Bloomberg Global Aggregate Bond Index rose 8 basis points to 3.99% on Wednesday, standing just one step away from the 4% threshold at a rare level unseen since 2007, with the single-day gain marking the largest since May. Meanwhile, the U.S. five-year Treasury yield breached 5% for the first time since 2007. The swap market has already priced in three rate hikes of 25 basis points over the next year, with expectations for a fourth hike also heating up noticeably.

The impact of the bond market selloff is also spilling over to other assets and the real economy. Financing costs for governments, corporations, and households are facing upward pressure, while higher risk-free yields will raise the discount rate for riskier assets such as stocks, suppressing their valuations. At the same time, volatility in the bond market has surged noticeably, with the ICE Bank of America MOVE Index climbing to its highest level since March on Wednesday, further increasing investors' caution before entering the market.

Weak Demand for Five-Year Auction, U.S. Treasury Yields Continue to Climb

U.S. Treasuries have been the core driver behind this round of global bond market adjustment. On Thursday, U.S. Treasury yields continued to rise, with the 10-year yield increasing 2 basis points to 5.14%, hitting a new high since 2007, while the 30-year yield reached its highest level since 2004.

The U.S. Treasury completed a $70 billion auction of five-year notes on Wednesday, where the accepted yield reached its highest since 2006. By a measure adopted by Bloomberg, this auction performed as the second-worst since records began in 2018, indicating that the market still demands additional compensation at higher yield levels. As U.S. debt approaches $40 trillion, rising interest expenses are further amplifying market concerns over fiscal conditions.

Strategists at both JPMorgan and KKR expect further upside room for U.S. Treasury yields, citing energy-driven inflation, large-scale government borrowing, and risks of further central bank tightening as key drivers. Bloomberg Markets Live strategist Alyce Andres stated that investors are selling Treasuries not due to a collapse in inflation credibility, but because the actual policy outlook and term premium still require greater concessions.

Selloff Spreads Across Asia, Japanese Yields Hit 30-Year High

Bond market pressure spread further to Asian markets on Thursday. Australia's three-year government bond yield jumped 14 basis points to 5.07%, touching its highest level since May 2011; New Zealand's two-year yield rose by as much as 17 basis points, edging closer to 4%.

The Japanese market, after reopening following a three-day holiday, quickly caught up with the global selloff, pushing the ten-year Japanese government bond yield to its highest level since 1996. Carol Lye, portfolio manager at Brandywine Global Investment Management, noted that local institutions such as pension funds, banks, and life insurers still lack sufficient demand to support the Japanese government bond market.

The global bond market adjustment also partially reflects a repricing of interest rate environments by the market. According to Bloomberg index data, global government bonds have fallen cumulatively by approximately 2.4% year-to-date, compared to a 6.8% increase during the same period last year, indicating significantly heightened pressure on the bond market.

High Inflation and Fiscal Demands Underpin Elevated Yields as Investors Wait for Volatility to Cool

Market participants cited in reports believe this round of bond selloff has certain fundamental support. Amy Xie Patrick, fund manager at Pendal Group, stated that inflation remains elevated and sticky across multiple economies, labor markets stay tight, and economic growth remains solid even amid rising fuel and commodity prices. In this context, bond performance aligns with current economic fundamentals.

Facing persistent selling, investor strategies have diverged. Damien Loh, Chief Investment Officer at Ericsenz Capital, believes that short-term bond valuations appear cheap, but does not advise immediately counter-trend buying; for investors seeking opportunities from the selloff, he prefers curve-steepening trades, such as 2y10s or 5y30s spread strategies, considering their risk-reward ratios more reasonable.

TD Securities strategist Hans Mikkelsen pointed out that the current contradiction in fixed income markets is that investors want higher yields but do not want them to continue rising rapidly. "They are afraid of catching a falling knife." Continuously surging bond market volatility is becoming the main obstacle deterring potential buyers from entering the market.