Global Financial Markets in Turmoil
Bond Markets Experience Sharp Selloff
A perfect storm is brewing in the world of finance, as a sharp decline in government bond markets and a surge in the US dollar are sending shockwaves through global financial markets. The uncertainty surrounding Donald Trump’s policies is exacerbating the situation, with the pain expected to intensify in the coming days.
Rise in Treasury Yields
On Wednesday, 10-year Treasury yields soared to above 4.7%, their highest level since April. This significant jump has had a ripple effect on global transactions, worth trillions of dollars daily. Meanwhile, UK peers have reached their highest level since 2008, sparking a fresh wave of selling in currencies such as the UK pound, which plummeted over 1%, and the euro, which edged closer to the $1 mark.
Inflation Concerns Resurface
Central banks had declared victory over inflation in 2024, but recent metrics suggest price pressures are on the rise again. Trump’s plans for higher trade tariffs, tax cuts, and deregulation threaten to push up inflation and strain government finances, thereby limiting the Federal Reserve’s scope to cut interest rates.
Expert Insights
“The start of 2025 was always going to be challenging, given the torrent of bond supply and policy announcements from the incoming U.S. administration,” noted Societe Generale strategist Kenneth Broux. “Conditions are building for a tantrum in bonds and an overshoot in yields. We’re looking at 5% in 10s.” The S&P 500, which had rallied post Trump’s win, has started to falter, as other governments focus on repairing their finances and shoring up their economies.
Global Bond Sales on the Rise
Long-dated yields, which tend to be less susceptible to short-term swings in expectations for monetary policy, have hit multi-year highs globally. This is partly due to the tidal wave of new bonds this year. Thirty-year Treasury bond yields have risen 60 basis points in a month, the largest such increase since October 2023. They are now perilously close to 5%, a level rarely seen in the past two decades.
Curve Steepening
This has pushed the premium of 30-year yields to two-year yields to its highest in nearly three years, a dynamic known as “curve steepening”. According to Danske Bank chief analyst Jens Peter Soerensen, “There’s a big pipeline of bonds that needs to be sold, so that gives you steeper curve as well as a higher term premium in longer bonds. I think that’s one of the main drivers.” UK 30-year gilt yields have hit their highest since 1998, around 5.4%, adding to worries about the impact of higher borrowing costs on the British government’s already shaky finances.
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