U.S. Government Bonds yields have surged to the highest level in three years. International oil prices jumped on military clashes between the United States and Iran, stoking inflation fears again. With concerns over the U.S. fiscal deficit adding to the pressure, a move to dump Government Bonds is spreading beyond the United States to major countries.
On the 2nd (local time), the Wall Street Journal (WSJ) said the 10-year U.S. Government Bonds yield rose intraday to 4.821%. It topped the previous day's high of 4.797%.
It was the highest level in about 2 years and 10 months since Nov. 1, 2023. It later gave back part of the gains and moved in the 4.79% range.
Even though employment indicators were weaker than the market expected, Government Bonds yields stayed elevated. The increase in U.S. private employment in August fell short of market forecasts. International oil prices also gave back part of their intraday gains.
Typically, when employment slows, the chance of the Central Bank cutting rates rises and Government Bonds yields can fall. This time, however, concerns about prices and fiscal conditions prevented yields from dropping.
If oil prices rise due to clashes between the United States and Iran, corporations and household expense burdens increase and prices can climb again. If inflation does not ease easily, the U.S. Federal Reserve (Fed) will find it difficult to cut rates. The market is even reviving the possibility of additional rate hikes.
The 2-year U.S. Government Bonds yield, which is sensitive to short-term rates, also rose intraday to 4.41%. It was the highest level since January last year. The 30-year yield also climbed intraday to 5.30% before edging down to the 5.25% range.
The market expects the rise in Government Bonds yields could continue for the time being. BlackRock Investment Institute analyzed, "Given stubborn inflation, large-scale government borrowing, and private funding demand, there is little reason for the upward pressure on Government Bonds yields to abate."
The sell-off in Government Bonds is spreading to major countries. On the day, Japan's 10-year Government Bonds yield topped 3% intraday. It was the highest level in about 30 years since 1996. The U.K. 30-year Government Bonds yield also rose intraday to around 5.92%, marking a record high since 1998. The 10-year Government Bonds yields of Germany and France also climbed to their highest levels since 2011 and 2008, respectively.
The WSJ assessed that even at the recent meeting of Group of 20 (G20) finance ministers and Central Bank governors, no clear solutions emerged for fiscal deficits, inflation, and geopolitical risks, and that the global bond market is effectively giving governments a "failing grade."
There is also a view that the current level of U.S. benchmark rates is not merely higher than in the past but could become the "new normal" ahead. Ajay Rajadhyaksha, global head of research at global investment bank Barclays, said, "The market expects artificial intelligence (AI) to boost growth while supply disruptions and massive government liability will intensify price pressures," adding, "Short-term rates could stay higher for longer than in the past."