Bond Market Selloff Hits Limits as Higher Yields Become Part of the Problem

The global bond selloff has been ongoing for some time, but it appears to be finally hitting its limits. According to Goldman's rates team, led by George Cole, the market is starting to establish 'boundary conditions' for the selloff, which suggests that higher yields are no longer looking like the solution to inflation worries.

The key factors contributing to this shift include softer US labour data, wider credit spreads, and a more patient Federal Reserve. As a result, duration has started to find its footing in the US, but volatility is unlikely to fully subside until yields themselves establish a clearer peak.

In Europe, French sovereign stress has become a significant brake on how far Bund yields can rise. This has led to a shift in the market's perspective, with higher yields now tightening financial conditions enough to create their own resistance. As a result, Gilts have benefited from this shift, while Japanese Government Bonds (JGBs) remain under pressure due to domestic supply and Quantitative Tightening (QT) pressures.

The question remains whether the bond market has finally found the edge of the move or merely a ledge to catch its breath. This week marked the first time in a while that the market began to lean towards higher yields becoming part of the problem, rather than the solution to inflation concerns.