Global bond market experiences a frenzied sell-off, with U.S. Treasury yields rapidly approaching 5%

Concerns over inflation and uncertainty in U.S. and European fiscal policies have intensified, leading to a massive sell-off in the global bond market recently, with yields rising rapidly.

On Wednesday, the yield on the 10-year U.S. Treasury bond briefly rose to 4.73%, approaching the 5% peak set in October 2023, before retreating. The yield on the 20-year U.S. Treasury bond has already surpassed 5%, while the yield on the 30-year U.S. Treasury bond reached 4.96%.

The yield on the 10-year UK government bond also climbed to 4.82%, a new high since 2008. Even the yield on the 10-year Japanese government bond has surpassed 1%, reaching its highest level in over a decade.

Inflation anxiety has prompted traders to lower expectations for interest rate cuts by the Federal Reserve and the Bank of England this year. Meanwhile, the market is weighing the impact of tariffs that President Trump may implement on prices, leading to a rise in global bond yields.

After the 20-year U.S. Treasury yield first broke 5%, the 10-year yield is also approaching

The resilience of the U.S. economy and the ongoing threat of inflation suggest that interest rates may remain high, putting pressure on the bond market.

The minutes from the Federal Reserve's December meeting indicate that officials are inclined to slow the pace of interest rate cuts. Current futures market pricing shows that traders expect only a cumulative cut of 36 basis points this year.

Since the Federal Reserve began cutting rates in September last year, U.S. Treasury yields have risen significantly, with the 10-year yield increasing by more than one percentage point. Although the increase on Wednesday moderated, the benchmark yield remains at its highest level since April of last year.

Additionally, Trump's promises of tariffs and tax cuts have added uncertainty to global trade and raised concerns about whether the U.S. can continue to service its ever-expanding debt without increasing debt costs.

James Athey, a portfolio manager at Marlborough Investment Management, stated, "The U.S. market is experiencing significant impacts as investors grapple with persistent inflation, strong growth, and the high uncertainty surrounding the incoming President Trump's agenda."

Institutions including Amundi SA, Citigroup Wealth, and ING have warned that yields may continue to rise. Options traders view 5% as the next key threshold for the 10-year U.S. Treasury bond.

Lilian Chovin, head of asset allocation at Coutts, remarked, "It is certainly possible for yields to reach 5%... Given the massive fiscal deficit, risk premiums and term premiums are coming into play."

"Triple Kill" of Stocks, Bonds, and Currencies in the UK

In the UK, the "triple kill" of stocks, bonds, and currencies has triggered memories of the "tax cut panic" in 2022 At that time, then-Prime Minister Liz Truss implemented a series of unconventional economic policies. Amid high inflation, she proposed significant tax cuts and increased government borrowing, leading to a sharp decline in UK government bonds and the pound's value.

On Wednesday, the yield on the UK benchmark 10-year government bond surged by 14 basis points to 4.82%, the highest level since August 2008. The pound fell against all major currencies, dropping 1.3% against the dollar to as low as $1.2321, the lowest level since April. The UK stock market declined, with the FTSE 250 index of mid-cap stocks falling by as much as 1.9%.

The inflation outlook has prompted traders to lower their expectations for interest rate cuts by the Bank of England this year. Currently, the money market is pricing in one rate cut by the Bank of England this year, with an 80% probability of a second cut. Before Wednesday, the market had fully priced in two rate cuts this year, with a 20% probability of a third cut.

The UK Treasury is also under pressure. Chancellor Rachel Reeves has been hoping to shape the Labour Party into a fiscally disciplined party to attract international investment and promote economic growth. However, this mission has encountered obstacles, as its employment policies and increased national insurance contributions are seen as likely to raise inflation.

The sudden rise in UK government bond yields threatens Reeves' slim margin of £9.9 billion ($12.2 billion) remaining after announcing her first budget in October. If debt costs remain at current levels, she may breach her main fiscal rule of not borrowing for day-to-day spending by the time of the next forecast from the Office for Budget Responsibility on March 26.

IG Group Chief Market Analyst Chris Beauchamp stated, “The rise in yields is a heavy blow, and it seems that the government sector not only fails to secure new funds to drive economic growth but also has to further cut spending.”