Global government bond yields have continued their surge, reaching significant milestones as economic data challenges prevailing notions about central bank rate peaks. The US 30-year government bond yields experienced a surge to its highest level since 2011, while other key benchmarks reached levels last seen in 2008. This surge in yields has been driven by robust economic data, which has defied earlier expectations and prompted speculation about future rate hikes.
During early US trading on Thursday, the 30-year Treasury yield experienced a notable increase of up to seven basis points, reaching 4.42%. This surpasses last year’s high and represents a stark contrast to the yield’s level of below 4% just a few weeks ago at the end of July. Simultaneously, the US 10-year yield approached 4.31%, coming within striking distance of its peak in 2022. Across the Atlantic, the UK saw its equivalent yield soar to a 15-year high, while Germany’s bond market neared levels last witnessed in 2011.
Treasuries have spearheaded the global debt selloff, dispelling concerns that the US economy would buckle under the pressure of Federal Reserve interest rate hikes exceeding five percentage points. The latest minutes from the Federal Reserve’s policy meeting indicated persistent worries about inflation, which have driven considerations for additional rate increases.
Jerome Schneider, the head of short-term portfolio management and funding at Pacific Investment Management Co., which oversees a substantial $1.8 trillion in assets, emphasized the potential for an extra Fed rate hike this year to ensure inflation remains under control.
The resilience of the labor market was underscored as Treasury yields maintained their upward trajectory following the release of the weekly report on new jobless claims. Japan, despite maintaining ultra-easy monetary policies and possessing the world’s lowest interest rates among developed nations, encountered tepid investor interest during its 20-year note auction.
In a broader context, the Bloomberg index for total returns on global sovereign debt registered a noteworthy increase to 3.3%, the highest since August 2008. Nonetheless, sovereign bonds have yielded a disappointing loss of 1.2% for investors in 2023, making it the poorest performer in Bloomberg’s major debt indexes.
This marked shift represents a departure from the beginning of the year, when optimism surrounding the conclusion of rate hikes propelled global bonds to substantial gains. Notably, the Bloomberg Global Aggregate benchmark enjoyed an impressive 3% surge in January, heralding the best opening month on record. However, the gauge’s momentum has waned, slipping by 0.1% for the year.
The allure of higher US yields continues to attract investors, as evidenced by a remarkable $127 billion influx into Treasury funds this year alone. This trend is on track to set a new record, according to Bank of America Corp., citing data from EPFR Global.
Long positions in Treasury futures have surged to an all-time high, bolstered by asset managers, as demonstrated by Commodity Futures Trading Commission data. A client survey by JPMorgan Chase & Co. indicated that long positions in the week leading up to August 14 matched the peak recorded in 2019, marking the highest level since the financial crisis.
Amidst this dynamic landscape, global bonds present an appealing investment opportunity. As the US lifts yields on a global scale, other economies grappling with weakness are compelled to follow suit. Experts, including Steven Major, global head of fixed-income research at HSBC Holdings Plc, posit that global bonds are poised to outperform in the next six to twelve months, as central banks approach the conclusion of their rate-hike cycles.
Nonetheless, Treasuries are not immune to pressures. Expectations of increased bond issuance by the US government to address growing federal deficits have contributed to the upward pressure on yields. The month of August has witnessed a surge of over 30 basis points in US 10-year yields, representing the most substantial monthly increase since February.
The latest surge in US bond yields has been led by inflation-protected bonds, which reflect the risk-free rate of return demanded by investors based on their outlook for the performance of riskier assets. Notably, the real yield on 30-year Treasury Inflation-Protected Securities has surpassed 2% for the first time since 2011. In parallel, the 10-year benchmark came tantalizingly close to 2%, a level last observed in 2009. This confluence of factors underscores the evolving landscape of global government bonds, driven by economic resilience, inflation apprehensions, and shifting investor sentiment.