Trouble brewing in global bond markets: What to know

Trouble brewing in global bond markets: What to know

Yields on government bonds are around multi-decade highs as investors cast a wary eye on fiscal deficits and the renewed fighting in the Middle East
A storm is gathering in bond markets across the globe as yields on government debt are in many cases near multi-decade highs. 
High and rising government debt levels pose a problem for bond markets for which no solution seems imminent. The rising deficits, meanwhile, are colliding with diminished demand for government debt.
On top of this, renewed fighting in the Middle East earlier this week pushed oil prices higher and elicited concerns of what one Wall Street analyst called an inflation monster. 
RT takes a look at the rumbling in global bond markets and what to look for in the coming days and weeks.
What happened and what caused itAfter fighting between the US and Iran restarted earlier this week, oil jumped more than $4 a barrel on Tuesday, settling at a five-week high of $94.65 per barrel Brent. Prices retreated somewhat later in the week, but oil is still set for a roughly 9% gain on the week. US diesel futures, meanwhile, surged to a 52-month high earlier in the week.
Bonds sold off sharply across the board on both Tuesday and Wednesday before stabilizing on Thursday. 
More broadly, the volatility comes as major economies have flooded the market with debt, demand for which has been tepid. In particular, the pool of price-insensitive institutional buyers is shrinking in what is a larger structural shift. All things being equal, investors want higher yields to absorb the quantity and also to protect themselves against rising inflationary risks.
Perhaps most concerning are what seem to be permanently expanding budget deficits in numerous countries, particularly given the apparent lack of political will to stem the profligacy. The US recently passed the $40 trillion debt mark with no sign of slowing down. Debt as a share of economic output is at or above 100% across the G7, except Germany, which seems determined to catch up.
Heavy borrowing by AI companies – which are in many cases unable to fund growth out of cash flow – is also contributing to the rising rates. According to a blog post by the European Central Bank, US tech giants are flooding European bond markets to fund AI investment, potentially reaching $1 trillion by 2028, thus crowding out other borrowers – including governments.
Meanwhile, higher energy prices are having a direct feed-through to inflation. Consumer prices in the Eurozone climbed 3.3% in August year-on-year, the fastest pace of inflation in nearly three years. The recent move higher in oil prices will only make this worse. 
What it all adds up to is that yields on government bonds across major economies are in many cases trading at levels not seen in years or even decades.
• The UK’s 30-year bond yield hit its highest level since 1998.
• Japan’s 10-year yield has broken through the 3% mark for the first time in three decades.
• Yields in Germany and France are also trading at their highest levels in a decade.
• The yield on the US 10-year, the single most important interest rate in the world, is at a level last seen in 2023.
It’s becoming harder and harder to disentangle all the factors behind the moves in bond markets, said Ed Al-Hussainy, a portfolio manager at Columbia Threadneedle. The only thing we can say right now is that they’re all pointing in the same direction, and that’s in the direction of higher rates, and they’re doing it globally.

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