The global bond market has faced intense selling pressure, leading to a surge in borrowing costs in major economies such as the US, France, and Japan. This development has heightened concerns among policymakers worldwide about the rising inflation and the need for further interest rate hikes. According to Reuters, investors entered the market late on Friday morning in the US, leading to a stabilization of the market and a decline in US bond yields.
The yield on the benchmark 10-year US Treasury note rose to 5.34% earlier, the highest level since 2002. This represents the largest quarterly increase in yields this century for the three months ending in September. Higher interest rates increase financing costs for companies and mortgage borrowers, while also raising budget costs for governments. As a result, governments are forced to spend more on interest payments.
The rising yields have led to a tightening of financial conditions, potentially increasing the risk of economic slowdown. The current economic situation can be described as a "K-shaped" recovery, where the lower segment of society has been struggling for some time, and there is a need to mitigate the impact of rising oil prices. This term refers to a situation where the economy's performance is uneven, with the wealthy thriving while low-income workers continue to decline.
French borrowing costs for 10-year bonds also reached their highest level since 2002 on Thursday, trading near the symbolic 5% level. This came after recording the worst quarterly performance since 1987 in the quarter ending in September. The difference between French and German 10-year borrowing costs is at its highest level since the eurozone debt crisis in the early 2000s.
The European Central Bank (ECB) faces questions about whether it will support the French bond market, although market traders believe this is unlikely in the current situation. However, recent European inflation data has been hotter than expected, and the ECB has raised interest rates twice this year. Market expectations suggest three further 25-basis-point hikes by mid-2027.
The upward pressure on yields and government finances is a global phenomenon. According to the Institute of International Finance, advanced economies paid over $3.3 trillion in interest on outstanding government bonds last year, exceeding global spending on defense and energy. The yield on British 30-year government bonds rose above 6%, its highest level since 1998, on Thursday.
The global bond market has experienced significant volatility, with assets such as stocks and credit facing fluctuations. Concerns about credit have increased in the derivatives market, with the index of credit default swaps for low-rated corporate bonds reaching its highest level since early April. As the global economy navigates these challenges, investors are closely monitoring the situation.
Key points
- The global bond market faces intense selling pressure, pushing borrowing costs to multi-decade highs.
- The US bond yield has risen to its highest level since 2002, while French borrowing costs have also reached a 20-year high.
- The European Central Bank faces questions about supporting the French bond market amid rising yields and inflation concerns.
