The average yield on the Bloomberg Global Treasury Index reached 3.68% in late July, the highest since the 2008 financial crisis. The index tracks government bonds from investment-grade countries.
Oil caused the latest jolt. Renewed fighting in the Middle East sent Brent crude above $100 a barrel on Thursday, and that revived worries about inflation just as the Federal Reserve, the Bank of Japan and the Bank of England prepared to make rate decisions. Investors had hoped this year’s debt-market selloff was behind them. It was not.
Records and near-records
The damage was spread across several markets:
UK gilt yields logged their longest run of daily closes above 5% in almost two decades. Germany’s 10-year yield hit its highest since 2011. The US 30-year yield traded just under its highest since 2007. In Japan, the 40-year yield rose 10 basis points on Friday to top 4%, and the five-year yield reached its highest since that maturity was introduced in 2000.
Australia’s benchmark yields were the highest in the developed world and could climb further, depending on upcoming inflation figures and comments from Reserve Bank governor Michele Bullock. UK markets were weighing expectations of two more rate increases by the end of the year.
The Fed question
Strong US jobs and growth data had pushed expectations away from rate cuts and toward a possible increase. Traders gave roughly a one-in-three chance of a hike at the Fed’s July 28-29 meeting.
Fed Chairman Kevin Warsh has chosen to offer less forward guidance, which adds uncertainty. The ICE BofA MOVE Index, a gauge of bond volatility, reached a two-month high on Thursday. Bank of America said the reduced guidance gives markets more room to price the action they think the Fed should take. Barclays analysts suggested that either a hike or a badly explained decision to hold could push parts of the yield curve higher.
Longer-term worries
Rising yields raise corporate financing costs, pressure equity valuations and strain governments with heavy debts. BlackRock’s iShares 20+ Year Treasury Bond ETF fell almost 5% in a month and has lost more than half its value since 2020. Bloomberg’s global bond benchmark still sat about 20% below its early-2021 peak.
Moody’s Ratings said markets may have entered a new macroeconomic environment of structurally higher inflation, higher interest rates, wider fiscal deficits and more pressure on government balance sheets.
