A global bonds selloff is accelerating following a rout in U.S. Treasurys.
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Experts attribute the downturn to investor unease with worsening fiscal trajectories, driven in part by a recent downgrade of the U.S. credit rating and President Donald Trump’s controversial tax bill. “Markets do not find Trump’s ‘big, beautiful tax bill’ beautiful at all,” said Vishnu Varathan, a managing director at Mizuho Securities.
The U.S. Treasury yield broke above the key 5% mark for the second straight day, holding at 5.088%. The benchmark yield has climbed over 15 basis points since the start of the week. The sell-off in Treasurys is rooted in investors’ declining confidence in U.S. assets.
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When investors dumped U.S. Treasuries last month, they turned to bonds in other markets. However, this time, the sell-off is more widespread, affecting several major markets globally.
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The sell-off in long-duration bonds across different markets is driven by distinct factors, with a common undercurrent of fiscal concerns prompting a reassessment of the term premium required to hold longer-dated bonds, according to Rong Ren Goh, Portfolio Manager, Fixed Income, at Eastspring Investments.
In Japan, the 40-year government bond yield hit a record high of 3.689% on Thursday. The 30-year government bond yield is also near all-time highs at 3.187%.
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The rapid steepening of Japan’s government bond yield curve is attributed to structural changes and the Bank of Japan’s inclination to tighten monetary policy amidst the country’s fiscal challenges, according to Bank of America.
Global bonds drive investor uncertainty
The sell-off in Japanese government bonds could exacerbate divestments from U.S. sovereign debt. “By making Japanese assets an attractive alternative for local investors, it encourages further divestment from the U.S.,” noted George Saravelos, Deutsche Bank’s global head of FX strategy.
German government bonds, known as bunds, are also witnessing significant sell-offs. The yield on 30-year German debt is up over 12 basis points, while the 10-year yield is up over 6 basis points. Philip McNicholas, Asia strategist of the global macro fixed income team at Robeco, attributes this to the removal of Germany’s debt brake, continental re-armament, and a shift away from Europe’s pro-austerity stance.
Mizuho Securities’ Varathan added that German bunds face pressure from wider deficits, which are likely structural in nature. The 30-year European government bond yields have climbed over 12 basis points this week, with 10-year yields rising by about 7 basis points. “Investors don’t really have much love for long duration bonds right now,” said Steve Sosnick, chief strategist at Interactive Brokers.
He added that global inflation concerns are also detrimental to longer bonds, as they are more influenced by investor expectations about the future economy, compared to shorter-duration bonds, which are influenced by central bank policy. Bonds in some emerging markets have bucked the global trend, with yields dropping. In India and China, 10-year bond yields have slipped marginally, due in large part to their more domestically-oriented markets and capital controls, according to McNicholas.
India’s 10-year government bond yield inched lower by about 2 basis points since Monday, while China’s 10-year yield also slipped slightly. “Foreign investors and global factors are far less relevant determinants for their respective yield curves,” McNicholas concluded.
