Global bond sell-off gains pace, Treasury yields at 16-year high

A sell-off in global bond markets gathered pace, driving yields to the highest level in more than a decade as traders brace for an extended period of tight monetary policy.

The yield on 30-year U.S. Treasuries hit 5% for the first time since 2007 on Wednesday, while the German 10-year benchmark rate climbed to 3% — a level unseen since 2011. In Japan, the 10-year overnight-indexed swaps jumped to 1% for the first time since January. 

Investors are demanding ever higher compensation to hold long-dated debt after major central banks made clear they were unlikely to ease policy any time soon. Concerns about increased Treasury issuance to fund swelling budget deficits have also weighed on longer securities. 

“US yields at highs for the year are starting to look disruptive for other regions and sectors in global fixed income,” HSBC Holdings Plc strategist Steven Major wrote in a note to clients.

The volatility has also spilled over into equities and is spreading to corporate notes, with at least two borrowers standing down from issuing Tuesday as blue-chip yields reached a 2023 high of 6.15%. The largest speculative-grade bond ETF was hit by the biggest two-day slump this year.

“These moves are starting to cause worries across all asset classes,” said James Wilson, a money manager at Jamieson Coote Bonds Pty in Melbourne. “There’s a buyer’s strike at the moment and no one wants to step in front of rising yields, despite getting to quite oversold levels.”

Bond losses accelerated on Tuesday after an unexpected jump in job openings reinforced speculation that the Federal Reserve isn’t done raising interest rates. The term premium on 10-year US notes turned positive for the first time since June 2021.

Global bonds are now down 3.5% in 2023, while ICE’s BofA MOVE Index for Treasuries volatility jumped to the highest since May on Tuesday. The average price for bonds in the Bloomberg US Treasury Index has tumbled to 85.5 cents on the dollar, half a cent above the record low in 1981.

European yields followed their U.S. counterparts higher, with the correlation between Bloomberg’s gauge of global securities and an index of Treasuries reaching the highest since March 2020. 

“US Treasury and European sovereigns are correlated,” says Althea Spinozzi, senior fixed income strategist at Saxo Bank. “A move higher in US yields will push higher European sovereign yields as well, despite Europe’s recession deepening.”

Yields on some of Asia’s emerging-market bonds were also dragged higher. The Indonesian benchmark climbed to levels last seen in November. 

“Long EM duration is a pain trade for most real money investors,” analysts including Min Dai, head of Asia macro strategy at Morgan Stanley, wrote in a note. Such positioning “increases the vulnerability of the market, especially if UST rates continue to march higher.”

But the very shortest end of the Treasury market still looks attractive to some. An enlarged 52-week bill sale on Tuesday attracted record demand from non-dealers, as investors locked in a yield above 5% for the next year.

Current yield levels will “suck capital away from the more risky asset classes as investors do not need to move along the risk spectrum to generate attractive returns,” Wilson from Jamieson Coote said.

“Ultimately we believe in the path higher, but it’s unlikely to be linear,” said Scott Solomon, a money manager at T. Rowe Price, who last week flagged the potential for 10-year yields to test 5.5%. “There’s a bit of a back and forth between some traditional bond buyers who have been forced into a bit of a buyers’ strike when it comes to duration versus those who view the yield levels as a good long term opportunity.”

The rout has also sent so-called real yields to multi-year highs, with the 10-year US inflation-adjusted rate climbing above 2.4% to the sort of levels reached in 2007 just before US equities topped out. 

“Sharp moves upwards in real yields always lead to deratings of the equity market,” said Amy Xie Patrick, head of income strategies at Pendal Group in Sydney. Cash is the best place to seek protection, she said.