The world’s biggest sovereign bond markets are heading for their worst month in years as soaring energy costs fan inflation and the AI boom lifts economic growth, leaving investors positioning for an era where interest rates stay higher for longer.
Two-year US Treasury yields have surged almost 60 basis points (bps) in September and are poised for the biggest monthly jump since early 2023.
Two-year borrowing costs in France, Germany, Britain and Australia are set for their biggest monthly jumps since March when the Iran war got underway, sparking a new energy shock. Japanese government bond yields are pinned near multi-decade highs.
“There’s a realisation that the whole energy story and inflation story will not go away in the very short term,” said Societe Generale’s head of corporate research for FX and rates Kenneth Broux. “Bond markets are adjusting to that.”
For some investors, rising yields have made government bonds attractive again, while others remain cautious towards long-dated bonds given concerns about high government debt.
October will bring new tests in the shape of the latest US jobs and inflation data, French budget talks, a UK budget, and likely more bond issuance from tech firms.
HIGHER FOR LONGER
Sovereign bond markets matter because they impact loans for businesses and consumers, such as mortgages. If borrowing costs there rise too quickly, that can threaten financial and economic stability, so governments and central banks pay close attention.
Compared with 2022, a year where bond returns were the worst on record, it is not just the speed of the move that is rattling markets but also the high and rising absolute level of global rates.
Data last week showed the rate on the most popular US home loan has risen to its highest in more than two years.
And 10-year Treasury yields, which have pushed above 5% for the first time since 2007, are poised for the biggest monthly jump since 2022 with a rise of around 50 bps.
The ICE BofA MOVE Index, a measure of bond-market volatility, has jumped almost 30% in September, the largest increase since March. That volatility, which is expected to continue, has caught some investors out. But some are sensing an opportunity.
Florian Ielpo, head of macro and multi asset portfolio manager at Lombard Odier Investment Managers, said he had turned more positive on government bonds given high yields.
He expects government borrowing costs to remain higher for some time, too, as the market competes with bond sales by big tech to drive AI investments.
The value of bond sales from hyperscalers has more than doubled this year to over $200 billion, according to LSEG data.
Dealmakers, too, say they can live with funding costs that are the highest since the global financial crisis.
“5% is not so high by historical standards,” Warburg Pincus CEO Jeffrey Perlman said at a conference in Singapore on Tuesday. “Deals can work at a 5% 10-year.”
CHALLENGES AHEAD
Still, in Europe, French budget talks and a first budget for new UK finance minister John Healey will likely keep big economies’ fiscal woes in focus.
Political tensions in France have added to eye-catching bond moves. Its 10-year bond yield has jumped over 50 bps this month, the biggest monthly move since 2022, pushing the gap over German Bund yields to the widest since 2012.
“Now you have the additional idiosyncratic risks in France’s case, now people think, where’s the budget or there won’t be a budget, what’s going to happen?,” said Nomura senior European economist Andrzej Szczepaniak. “Also now (far-left presidential contender Jean-Luc) Melenchon is gaining popularity in the opinion polls.”
In the United States, while a September rate rise has boosted the Federal Reserve’s inflation-fighting credentials, uncertainty on the outlook and next steps from a Treasury that has taken some action to rein in borrowing costs were in focus.
“Policy uncertainty is coming at us from two places, the Fed and the Treasury, and I am deeply uncomfortable about the US policy mix,” said Pictet Asset Management senior multi-asset strategist Arun Sai.
(Reporting by Dhara Ranasinghe)
