Global Bond Market Sell-Off Sparks Concerns Over Government Finances
A rapid decline in global bond markets is sparking concerns over government finances, leading to higher borrowing costs for consumers and businesses worldwide. The sell-off is being fueled by rising bond yields, which have reached 14-month highs in the US, with the 10-year Treasury yield touching 4.799% on Monday.
Rising Yields: A Global Phenomenon
The trend is not limited to the US, with bond yields rising globally. In the UK, 30-year gilt yields are hovering at their highest level since 1998, while Japan’s 10-year government bond yield has risen over 1%, hitting its highest in 13 years. India, New Zealand, and Australia are also experiencing near two-month highs in their 10-year benchmark government bonds.
China: The Exception
China’s bond market is bucking the trend, with its 10-year bond yield plunging to a record low this month. The country’s central bank has suspended government bond purchases to cool the rally.
Factors Contributing to the Sell-Off
Market analysts point to a confluence of factors driving the bond sell-off. Investors are anticipating fewer rate cuts from the Federal Reserve than previously expected, leading to higher borrowing costs. The Fed’s projected rate-cut path has become more uncertain following a hotter-than-expected US jobs report, which showed nonfarm payrolls increasing by 256,000 in December.
Government Deficits and Inflation Concerns
Elevated government deficits are also contributing to the bond sell-off, as more debt supply hits the market. The US government recorded a deficit of $129 billion in December, 52% higher than last year. The UK’s public sector net debt stands at over 98% of its GDP, stoking inflation concerns.
Implications for Governments and Corporations
Higher yields have significant implications for governments and corporations, increasing the amount of money needed to service debt. This could lead to “bond vigilantes” demanding higher rates to take on large debts. Rising US yields also make it harder for central banks to deliver rate cuts in the near term.
Impact on Businesses and Consumers
The borrowing costs for businesses are benchmarked to government bonds, so as government bond yields rise, so do borrowing costs for companies. This could lead to lower profits or foregone opportunities. Rising yields also tighten borrowing costs, strengthen the dollar, and decline equities, affecting consumer confidence and having a ripple effect on housing and retail spending.
Market Participants Await Trump’s Inauguration
Market participants are now awaiting the inauguration of US President Donald Trump next week, which is expected to bring a wave of executive orders on tariffs and immigration restrictions. The bond market is witnessing a “buyer strike” at the moment, with yields expected to continue rising aggressively if Trump’s policies are perceived as inflationary or having negative ramifications for the budget deficit.
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