Global government bonds saw a widespread sell-off, with the US 10-year Treasury yield surging 15 basis points to 5.12%, its largest one-day increase since April 2025. This surge was attributed to stronger-than-expected US economic data, including the fastest expansion in activity in over five years according to flash PMI figures, and weak demand at an auction of five-year notes, which pushed their yield above 5% for the first time since 2007. The average yield on global government debt is now nearing 4%, indicating a genuine re-tightening cycle, according to Tony Miano of Wells Fargo Investment Institute.
The Federal Reserve's recent interest rate hike, the first since 2023, brought borrowing costs to a range of 3.75% to 4%. Traders are now pricing in a 68.6% likelihood of a quarter-point hike and fully reflect three quarter-point hikes over 2027, with significant hedging for a fourth. Fed Governor Michael Barr stated that further rate hikes are likely necessary to achieve the central bank's 2% inflation target, leading to higher discount rates for equities, increased mortgage and corporate borrowing costs, and a higher bar for risk assets.
Simultaneously, the US and China announced a two-month extension of their trade truce until January 10, ahead of President Xi Jinping's first state visit to the US in 11 years. US Treasury Secretary Scott Bessent announced the extension, though the Chinese government has not confirmed the specific expiration date. While this removes an immediate source of uncertainty, analysts, like Scott Kennedy of the Center for Strategic and International Studies, note that the short duration suggests the US is not yet satisfied with China's offers on issues like rare earths. Chinese equities reacted negatively, with mainland China equities falling over 1% and the CSI 300 Index dropping 1.3% at midday.
The global bond rout extended to other markets, with Japan's 10-year yield climbing seven basis points to 3.055%, its highest since 1996. Australia's 10-year yield advanced 15 basis points to 5.40%, and New Zealand's equivalent saw its biggest jump since early March. Despite the mixed stock performance, with Japan's Nikkei 225 Index rising 1.7%, the broader MSCI Asia Pacific Index edged 0.2% lower, reflecting concerns about higher energy costs and a strong US economy keeping pressure on bonds and equities.
