Global bond markets saw a week of heightened volatility driven by resurgent inflation fears and concerns over fiscal discipline. Yields on government bonds rose sharply across major economies, with the UK 10-year gilt yield briefly surpassing 5.28%, its highest level since the global financial crisis, before falling back below 5.2%. In the US, the 10-year Treasury yield climbed above 4.7% for the first time since 2025, and at one point, the 30-year yield reached its highest point since 2008. France's 10-year OAT yield also hit a roughly 18-year high of 4.20%, reflecting an elevated fiscal risk premium compared to Germany.
Analysts attributed the bond sell-off to several factors. Gemma Cairns-Smith of Ruffer noted that forces previously suppressing inflation are now reversing, leading bonds to move in tandem with equities rather than acting as a cushion. The expectation of higher interest rates for longer due to stronger growth and sticky inflation was a key driver. Additionally, persistent fiscal deficits, heavy government borrowing, and increased competition for capital are exerting upward pressure on long-term yields. Neil Shearing of Capital Economics highlighted a recalibration of market views on US public finances, as total government debt surged past $40 trillion and annual deficits are projected at 6% of GDP.
The global bond sell-off began to ease by Thursday and Friday, primarily due to dovish remarks from US Federal Reserve Governor Christopher Waller. Waller indicated he would be inclined to support holding interest rates steady in two weeks if disinflationary trends continued, contrasting with earlier hawkish sentiment. This statement caused short-dated US yields to drop and reduced the market-priced probability of a September Fed rate hike to 50% from 70%. Equity markets reacted positively, with the S&P 500 rallying 1%, the Nasdaq adding 1.4%, and the Dow Jones climbing 1.2%. European markets also saw gains, though some nerves remained ahead of the US August jobs report.
