Bond Markets at Breaking Point: Inflation, Fiscal Deficits Spark Global Sell-Off

Global bond markets are at a critical juncture as long-end yields surge across developed economies. This synchronized increase is unprecedented, unlike previous episodes driven by idiosyncratic factors such as political uncertainty or joint liability concerns.

The Japanese 30-year yield stands out, reaching 4.2%, four times the policy rate of 1%. The Bank of Japan's failure to keep pace with inflation has put pressure on long-end yields, exacerbated by the yen's weakness and recent joint intervention between the US and Japan.

Similarly, in the US, the 10-year yield is nearing 5%, a level that could trigger resistance from the Treasury. The root cause of this pressure lies in the sizeable fiscal deficit, with Treasury Secretary Scott Bessent signaling discomfort at elevated yields through increased long-end buybacks starting on September 9.

The European Central Bank has hiked rates and is poised to do more, while eurozone long-end yields are being driven by a combination of factors including US fiscal pressure, changing political dynamics, and energy shocks. The spread between Japanese and German 30-year yields has widened, with the UK gilt yield at nearly 6%.