Global Bond Sell-off Sends Treasury Yields to 24-Year High

A global bond sell-off intensified on Thursday, pushing US 10-year Treasury yields to 5.34%, their highest level since 2002. The surge in government borrowing costs triggered sharp declines across major equity indices, with London's FTSE 100 falling almost 1.7% in its worst daily drop since May.

Drivers of the sell-off

Fears of renewed inflation from persistently high oil costs spooked investors on both sides of the Atlantic. The bond sell-off was driven by concerns that Middle East conflict would restrict oil supplies, keeping energy prices elevated. Brent crude rose 3% to about $101 a barrel. This rise occurred despite analysis showing crude exports from the Strait of Hormuz had largely returned to pre-conflict levels. Traders balanced this export recovery with uncertainty over a long-term conflict solution. Oil producers and the shipping industry have found alternative ways to transport fuel out of the region.

Central bank and policy outlook

Markets anticipate further interest rate hikes from major central banks to prevent price increases from becoming embedded. US bonds weakened despite lower-than-forecast inflation data released on Wednesday, which was expected to calm nerves about further Federal Reserve moves. Traders remain anxious the Fed will continue raising rates, citing the strength of the US economy and the prospect of workers bidding up wages. Axel Rudolph, chief technical analyst at IG, said the latest data reduced expectations of a Fed hike in October. He added that investors remain wary persistent inflation and higher oil prices could keep rates elevated longer, with the prospect of a December increase keeping pressure on bond markets.

Regional bond market impacts

Yields rose sharply across major economies. In the UK, the yield on 30-year bonds hit 6% for the first time since 1998 before easing slightly later in the day. Yields on UK five- and 10-year bonds also climbed. Eurozone countries were caught in the wave of selling. The spread between French and German government bond yields, an indicator of perceived additional risk for France, jumped to its highest level in more than a decade. Japan’s 10-year yield rose towards the 30-year high set last month, pressured by a weaker yen and Bank of Japan rate hikes.

Investor sentiment and strategist views

Analysts describe a 'buyers’ strike' in bonds. Neil Wilson, investor strategist at Saxo UK, said, "There is carnage in the bond market, which is hitting stocks hard." He added that the relentless rout was sending investors running for cover. Mohit Kumar, an economist at Jefferies, said growing concern over debt issued to fund government deficits is a key factor. Inflation, deficit, and issuance concerns continue to weigh on the market. Kumar noted hedge funds have suffered and lack the risk appetite to fade the move, while real money investors may have appetite but will not step in until stability returns. The US dollar benefited from the caution, climbing to a three-month high.

Government borrowing costs worldwide continued a months-long upward trend. Investors are reacting to a perceived lack of political will to tackle fiscal deficits while inflation remains stubbornly above target and central banks push rates higher. The Institute of International Finance noted major economies now face persistently large deficits and rising interest expenses. Jeff Kilburg, CEO of KKM Financial, pointed to fatigue after 50 basis points of movement in 18 trading days. He expressed optimism the move to a 5% yield could be short-lived if a U.S.-Iran deal ends the war, potentially returning the 10-year yield to a range of 4.5%-4.75%. Continued U.S. Presence in Iran, however, would be problematic for yields. Investors remain anxious that the Fed will continue raising interest rates to fight inflation, keeping pressure on bond markets until stability emerges.