Bond Markets Unravel as Yields Surge Across Global Asset Classes

Global bond markets are in turmoil, with yields rising sharply across various asset classes. On September 10, the 30-year US Treasury yield reached a 21-year high of 5.37%, while the two-year yield jumped 13 basis points (bps) within a day. Japan's 10-year government bond yield crossed 3% for the first time since September 1996.

The European Central Bank raised rates in September, citing inflation risks, and Brent crude prices soared above $100 after attacks on shipping in the Strait of Hormuz. Meanwhile, Malaysia's 10-year Government Securities (MGS) yield rose 29.5bps between August 26 and September 9 to 4.16%.

According to senior economist Woon Khai Jhek, CFA, this is an 'everything, everywhere, all-at-once moment' for global bond markets. He notes that there are two clocks running in the bond market: a fast clock driven by recent events and a slow clock influenced by structural changes.

The fast clock includes factors such as oil prices, war, inflation prints, shifting rate expectations, and term premium resets. The slow clock is more structural, with the term premium resetting towards its longer-run norm after years of quantitative easing and yield curve control. Normally, only one clock is audible at a time, but both are ticking loudly now.

This simultaneous movement has left investors struggling to price the market accurately. Woon Khai Jhek argues that the slow clock still matters but acknowledges that it no longer explains the pace or violence of the current market movements.

The Bank of Japan's decision to end quantitative easing and exit negative rates has contributed to rising yields, as the buyer that once absorbed super-long bonds regardless of yield is gone. This development could lead to a vicious cycle if not managed well, with higher term premium raising the cost of servicing government debt and widening deficits.

For Malaysia specifically, Woon Khai Jhek expects RM175 billion to RM185 billion of gross MGS and Government Investment Issue (GII) issuance this year. He notes that every maturity is rolled at today's yields, not 2020's, which means debt servicing charges have been rising amid a larger overall debt burden and higher interest rates.

Woon Khai Jhek advises watching demand at the long end, as investors are avoiding duration rather than Malaysian government paper. The gap between bid-to-cover ratios for shorter- and longer-term auctions will provide insight into how much of the refinancing arithmetic will be absorbed.