Global bonds are experiencing a significant sell-off, delivering losses to investors who had anticipated an end to the year's bond market rout. This downturn is largely due to a recent surge in energy prices, which has renewed fears of inflation and is now challenging the credibility of central bankers worldwide.
Several key benchmark yields illustrate the extent of this sell-off. UK gilt yields have closed above 5% for the longest period in nearly two decades, Germany's 10-year yield has reached its highest level since 2011, and Japanese peers are nearing levels last seen in the 1990s. The US 30-year yield is just below its highest point since 2007, while shorter-maturity Treasury yields have also hit their highest levels in over a year.
The average yield on the Bloomberg Global Treasury Index, which tracks investment-grade government bonds, has surged to 3.68%. This surpasses a three-year-old peak and marks the highest level since the 2008 global financial crisis. The index is currently on track for its largest monthly loss since March. This simultaneous pressure on both front-end and long-end yields is occurring ahead of a weekend that may bring further geopolitical headlines and significant central bank meetings next week, including those of the Federal Reserve, Bank of Japan, and Bank of England.
Bond markets have been pressured throughout the year by rising oil prices, initially influenced by tensions in the Middle East. Although crude prices fell in June following a ceasefire between Iran and the US, renewed hostilities have pushed Brent crude above $100 a barrel. The market is also grappling with expectations for Federal Reserve monetary policy, with market-implied odds of a rate hike standing at one-in-three. Analysts from Barclays Plc suggest a hike could push the market to reassess the terminal rate higher, flattening the yield curve, while an inadequate explanation of events could lead to higher long-term rates. Japan's 10-year yields are also increasing amid concerns about the Bank of Japan's ability to control inflation and a weakening yen.
One notable casualty of this market turmoil is BlackRock Inc.'s iShares 20+ Year Treasury Bond ETF, a widely used instrument for tracking longer-maturity US government debt. The ETF has fallen almost 5% over the past month and has now lost more than half its value since 2020. Atsi Sheth, chief credit officer at Moody's Ratings, stated, "We think we've entered a new macro regime," characterized by structurally higher inflation and interest rates, wider fiscal deficits, and increased global uncertainty that could impact government balance sheets.
