London
The world’s largest bond markets are experiencing a sell-off, as higher interest rates become a new norm. In the US Treasury market, which serves as the foundation of the global financial system, yields on 10-year bonds have surged to levels not seen in 16 years. Germany has seen its bond yields rise to their highest levels since the 2011 eurozone debt crisis, and even in Japan, where official rates remain below zero, bond yields are at levels last seen in 2013.
The increase in government borrowing costs is impacting various aspects of the economy, from mortgage rates for homeowners to loan rates for corporations, causing concern among investors.
This surge in interest rates comes as inflation, excluding food and energy prices, remains high and the US economy shows resilience. Central banks are pushing back against expectations of rate cuts, with traders now foreseeing the Federal Reserve cutting rates only to 4.7%, up from the 4.3% anticipated in late August.
Investors are also worried about the fiscal outlook, as August saw Fitch downgrade the US rating due to high deficit levels. Highly-indebted Italy recently raised its deficit target, which further adds to concerns. As deficits increase, more bonds are sold at a time when central banks are offloading their holdings, leading to rising yields on longer-dated bonds as investors demand more compensation.
