Global bond sell-off spreads as oil holds above $100

A sell-off in US government debt spread to Asia on Thursday, with yields on Japan’s benchmark government bonds hitting their highest level in three decades.

Japan’s 10-year government bond yield rose 0.1 percentage points to 3.075 per cent, the highest level since 1996, while five-year yields rose by 0.095 percentage points to 2.37 per cent.

The moves come after US Treasuries suffered their worst single-day sell-off since Donald Trump’s “liberation day” announcements last year, as strong economic data and oil price gains prompted investors to reassess the probability of further Federal Reserve rate rises.

The 10-year Treasury yield jumped 0.15 percentage points to 5.11 per cent on Wednesday and rose to as high as 5.13 per cent on Thursday morning in Asian trading.

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Government bonds from the UK, France and Germany also sold off heavily on Wednesday.

“We are in what I would call a correlated move higher in yields. There’s no escape,” said Eric Robertsen, head of global research and chief strategist at Standard Chartered in Singapore.

Higher bond yields mean the cost of borrowing for governments is rising at a time when they are aggressively increasing spending. On Wednesday the OECD warned that surging bond yields were a “major concern” for countries’ public finances.

“It’s this combination of fiscal risk made worse by political uncertainty,” Robertsen said. “You’re now in this negative feedback loop.”

Wednesday’s surge in US yields came after data showed American business output accelerated at the fastest pace in five years this month. Meanwhile, Brent crude rose above $100 once more to stand at about $102 a barrel on Thursday.

“There’s been a big change,” said Andrew Pease, Asia-Pacific head of investments for Russell Investments. “The Fed has started to tighten. Markets are jittery because there’s been big changes in expectation about the drivers of the US economy.”

The market is now pricing in about a 70 per cent chance that the Fed raises rates at its next meeting in October, up from about 50 per cent at the start of Wednesday.

“A supply-side shock accompanied by an overheating economy – that’s something that the central bank would have to deal with, which is what the market is starting to speculate on,” Pease said.

Richard Yetsenga, chief economist and head of research at ANZ, said that US plans to restrict exports of diesel were also playing a role in pushing up global yields.

“The US seems to be considering trying to reduce costs for itself by imposing additional costs on other economies,” Yetsenga said. “Japan continues to have its own challenges because of the market perception that the Bank of Japan hasn’t been tightening enough and hasn’t been signalling a firm enough future intent to bring inflation back to target.”

The yen strengthened slightly to trade at about ¥158 to the dollar but has weakened more than 1 per cent since the Fed raised interest rates last week.

“The Fed was hawkish when they hiked. The Bank of Japan wasn’t. This is why the yen has been struggling,” Pease said.

In a note on Thursday Mansoor Mohi-uddin, chief economist at Bank of Singapore, wrote that the bond market was “hit by a range of factors”, which included the US and Iran trading hostile words at the UN and Fed governor Michael Barr warning that rates may need to rise again.

Mohi-uddin said yields for 10-year Treasuries were increasing due to strong AI-led growth and large US fiscal deficits rather than inflation expectations.