Major sovereign bond markets worldwide are poised to record their worst monthly performance in years, as rising energy costs and inflation concerns coincide with a surge in artificial intelligence investments that support economic growth. This has led investors to reassess their expectations for a new era of prolonged higher interest rates. According to Reuters, US two-year Treasury yields have jumped about 60 basis points in September, heading for their largest monthly increase since early 2023.
The cost of borrowing for two-year government bonds in France, Germany, Britain, and Australia is also set for its biggest monthly jump since March, when the Iranian war sparked a new shock in energy markets. Meanwhile, Japanese government bond yields have stabilized near their highest levels in several decades. Kenneth Bro, head of corporate research for currencies and interest rates at Societe Generale, said that markets are coming to terms with the fact that energy and inflation effects will not disappear in the short term, driving bond markets to adjust their expectations.
US Treasury yields have exceeded 5% for the first time since 2007, and are on track for their largest monthly increase since 2022, with a 50 basis point rise. Additionally, the most common US mortgage rate has risen to its highest level in over two years, reflecting the transmission of higher borrowing costs from bond markets to consumers and businesses. The ICE BofA MOVE index, which measures bond market volatility, has increased by 30% in September, its largest rise since March.
Some investors believe that current yield levels offer opportunities in government bonds, despite expectations that borrowing costs will remain high for some time, particularly with large technology companies competing for liquidity to fund AI investments. According to LSEG data, the value of bond issuances by major cloud computing companies has exceeded $200 billion since the beginning of the year, more than doubling the same period last year.
Jeffrey Perelman, CEO of Warburg Pincus, said that a 5% yield on 10-year US Treasury bonds is not historically high, and that investment deals can still be viable at this financing cost. Markets are awaiting US inflation and jobs data in October, as well as French budget negotiations and the British budget, in addition to potential further bond issuances by technology giants.
In France, the 10-year bond yield has risen by more than 50 basis points in September, its largest monthly increase since 2022. The gap between French and German bond yields has widened to its largest since 2012, amid growing concerns about public finances and the budget outlook. In the US, the mix of monetary and fiscal policies remains a source of uncertainty.
The global bond market is bracing for a prolonged period of higher interest rates, driven by persistent inflation and energy concerns. As investors reassess their expectations, bond yields have risen, making government bonds more attractive to some investors, but also raising concerns about high government debt levels and the impact on borrowing costs.
Key points
- Global bond markets face worst monthly performance in years amid rising energy costs and inflation
- US Treasury yields have exceeded 5% for the first time since 2007
- Investors await US inflation and jobs data, French budget negotiations, and British budget announcement
