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Global bond sell-off leaves US trapped in ‘vicious loop’

▸ Treasury yield hits highest since 2002 ▸ Gulf war drives up borrowing costs

EMILY HERBERT AND IAN SMITH — LONDON WILLIAM SANDLUND — HONG KONG LEO LEWIS — TOKYO

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Borrowing costs across the US and Europe surged yesterday as pressure from the Iran war’s energy shock on public finances intensified around the world.

Yields on 10-year Treasuries climbed as much as 0.05 percentage points to 5.34 per cent, a level last seen almost a quarter of a century ago. Bond yields rise as prices fall.

Traders warned that the $32tn US government bond market, an anchor for global finance, was caught in a “vicious loop” of selling. The bonds later rallied to 5.24 per cent, down 0.05 percentage points on the day.

Selling in the US spread across the Atlantic, with the yield of the UK’s 30year gilt climbing above 6 per cent for the first time since 1998 before later easing to 5.93 per cent.

In France, which has been a particular victim of the Iran sell-off that has combined with worries over domestic political risks, the 10-year yield rose as much as 0.1 percentage points to 4.96 per cent, its highest level since mid-2002.

Meanwhile, Italy’s 10-year government bond yield was up 0.05 percentage points to 4.69 per cent, taking its spread with German debt to 1 percentage point for the first time since March.

Traders had been “dazzled” by the scale of the recent government bond sell-off, said Rob Subbaraman, head of global macro research at Nomura, adding that this was driven by higher inflation and concerns about the sustainability of government deficits.

The surge in yields has swept across the global economy, raising borrowing costs for consumers, businesses and governments.

US conventional 30-year mortgage rates jumped 0.25 percentage points — the biggest increase in four years — to 7.28 per cent this week, according to Freddie Mac data released yesterday.

Investors have warned that jumps in yields in recent trading sessions have been exacerbated by hedge funds and other big investors, which have ditched long-term debt to counteract the effect of rising rates on their broader debt portfolios, or to unwind lossmaking trades as the market has sold off.

Brent crude, the international oil benchmark, was up 3.2 per cent to $101.15 a barrel yesterday, adding upward pressure to yields.

Mike Bell, head of market strategy at RBC BlueBay Asset Management, said: “You’ve got to a position where lots of people are getting stopped out of long positions or thinking: I don’t want to hold this as [the yield] keeps going up.”

The latest swings in Europe’s bond market came as the French government proposed a 2027 budget with €43bn of cuts and tax rises amid increasing fears over the health of its public finances.

The euro dropped as much as 1 per cent to a 16-month low of $1.12, buffeted by higher oil prices and what analysts said were rising risks from the bond market sell-off.

Italy and other Eurozone government bonds were starting to suffer from “spillovers” from the French bond selloff, said Pooja Kumra, rates strategist at TD Securities. “[The] moves have been significant and will need some vocal intervention from policymakers.”

Global bond sell-off leaves US trapped in ‘vicious loop’

▸ Treas­ury yield hits highest since 2002 ▸ Gulf war drives up bor­row­ing costs

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▸ Treasury yield hits highest since 2002 ▸ Gulf war drives up borrowing costs