The bond market rout is global. Here’s what’s driving it

By John Towfighi, CNN

(CNN) — The rise in bond yields is a global phenomenon, rooted in investors’ unease over unchecked government spending and intensified by bets that central banks may keep interest rates higher for longer.

The US Treasury market gets the attention as the largest and most influential bond market in the world. But yields are also rising on government bonds in France, Germany, Italy, the United Kingdom, Japan, Canada and Australia.

Yields this week touched multi-year and multi-decade highs. Investors are selling bonds, pushing prices lower and yields higher. Yields rise when bond prices fall.

Bond yields set interest rates across the economy, and a steep rise in yields can raise the cost of mortgages, auto loans and student borrowing, making life less affordable.

“At this stage, the bond market is not signaling a crisis,” Kristian Kerr, head of macro strategy at LPL Financial, wrote in a note. “However, it is sending a warning that merits attention.”

Bond yields were lower Thursday. The bond market is taking a breather after a run up in yields to start the week. But investors say the factors keeping yields elevated are here to stay.

Global reverberations

Economies across the globe are facing stickier inflation because of the surge in energy prices tied to the war with Iran. That is leading to fears that central banks may need to keep interest rates high – and in some cases consider raising them even higher – to tamp down the price pressures in their economies.

Another important factor is the supply of bonds. As governments ramp up borrowing to fund war and increased defense spending, investors are demanding greater compensation (in the form of higher yields) to hold all that new debt.

And if inflation remains sticky, governments might introduce subsidies to help consumers deal with price pressures. That means more government spending, higher deficits, and more bonds, exacerbating the issues investors are concerned about.

“The global bond market is reacting to the potential danger that this is a prolonged crisis, and then governments have to spend more money,” Marko Papic, chief investment strategist at BCA Research, told CNN.

Papic said he thinks elevated uncertainty over the duration of the war is compounding nerves in the bond market. And relatively robust global economic growth is also pushing up yields.

Compounding problems

In Europe, energy inflation concerns have roiled major economies. In the backdrop, there are nerves about fiscal health and a series of upcoming elections.

The 10-year yield in France this week hit its highest level since 2008. The bond market is signaling concern that the government’s proposed budget won’t help get government spending on a more sustainable path, noted Kerr at LPL Financial.

“European and global sovereign debt markets remain highly interconnected, and a material deterioration in confidence toward French debt could easily spill over into other countries with weaker fiscal profiles,” Kerr said in a note.

The UK 10-year yield this week hit its highest level since 2008, while the 30-year yield touched levels not seen since 1998. Yields are surging just as Prime Minister Andy Burnham’s tenure is getting started, signaling skepticism from bond investors that his government will be able to get the UK fiscal order in check.

The bond market has tested the UK government repeatedly in the past. In 2022, former Prime Minister Liz Truss was forced out after 44 days in office, after the bond market revolted against plans for unfunded fiscal spending and tax cuts.

In Japan, the 10-year yield this week hit 3%, its highest level in 30 years. Japan’s yields have surged in recent years as the Bank of Japan has begun to raise interest rates after decades of ultra-loose monetary policy. Meanwhile, Japan has a massive debt burden, and investors are wary of policies that include spending and tax cuts, which could further swell borrowing needs.

A long time coming

In recent years, governments have ramped up spending, pushing up debt burdens. That has added to concerns about the amount of debt flooding the market. At the same time, bond yields are up sharply since the Covid pandemic after central banks hiked rates aggressively in 2022 to combat surging inflation.

There was a period of ultra-low interest rates after the 2008 financial crisis, but that era has come to an end, analysts say. Yields are returning to past levels. The difference is how much debt governments are in now. Higher yields with larger debt burdens makes paying off the debt more difficult and compounds the deteriorating fiscal situation.

“Governments are spending too much, and you can put fighting wars in that category,” Tom Tzitzouris, head of fixed income research at Baird Strategas, told CNN.

“We can’t avoid this other than ceasing spending, and even if the US were to pull back, the rest of the world has got to as well,” Tzitzouris said. “Governments have got to pull back their spending. That is the problem.”

What it means for you

Bond market turmoil comes in different flavors. What’s happening in markets now is a steady, sustained push higher in yields.

“Global investors are looking at a potent mix of higher inflation, higher interest rates and an unsustainable fiscal path,” Joe Brusuelas, chief economist at RSM US, told CNN.

That’s happening while tech firms continue to issue debt to fund the buildout of AI infrastructure.

This rise in yields, investors say, is driven by a fundamental factor : a growing supply of bonds. That isn’t expected to abate anytime soon, unless governments rein in spending and raise taxes or tech companies scale back their plans for the AI buildout. Neither scenario seems immediately likely, suggesting that yields could remain elevated as investors continue to demand more compensation for lending money.

“You put all of those together, you’ve got a recipe for a global increase in interest rates, which means everything that touches credit in the major economies is about to get much more expensive,” Brusuelas said.

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