Global bond markets are in a state of turbulence as the US reopens after Labor Day, facing a surge in corporate and government bond supply. Analysts are describing the situation as "the calm before the storm" for Treasury yields, which are under pressure from a combination of factors. A key event is set for September 9, when the government will auction $39 billion of 10-year notes and expand its long-dated buyback operations to $4 billion per operation from $2 billion. This is compounded by a projected record-breaking month for investment-grade corporate bond issuance, with some forecasts reaching $215 billion, potentially even $250 billion, driven by AI companies rushing to raise funds. This heavy supply is expected to divert demand from Treasuries and push yields higher.
The sell-off extends beyond the US, with Japan's 10-year bond yield hitting 3% for the first time since 1996, and significant increases in yields across Germany, France, and Britain. The Middle East crisis is fueling higher global oil prices and inflation, driving expectations for central bank rate increases. The US debt load has surpassed $40 trillion, and concerns about its long-term fiscal health are prompting investors to demand higher premiums, particularly for 30-year yields. Despite intervention from the US Treasury last month to cap borrowing costs, 30-year Treasury yields have recovered two-thirds of their fall.
Several factors are contributing to the global rise in borrowing costs. In Europe and the UK, heightened inflation expectations are a primary driver, while in the US, higher real yields are playing a significant role, though inflation expectations are also rising. The recent hawkish stance from Federal Reserve Chair Kevin Warsh, following the Jackson Hole meeting, initially aimed to rein in long-end yields but has been overshadowed by the resumption of the conflict between the US and Iran and subsequent higher energy prices. This has added new bearish impetus to bonds. The global nature of this shift is also impacting other markets, with Australian 10-year yields seeing a sharp rise due to fears of fewer Japanese buyers of their debt as JGB yields climb.
