Global government bond yields have surged, with Germany's 10-year government bond yield increasing by 4 basis points (0.04%) to 3.378% on September 2, its highest since 2011. Similarly, Japan's 10-year government bond yield stood at 3.016%, remaining above 3% after crossing this threshold for the first time in three decades.
In the United States, the 10-year government bond yield reached 4.81%, its highest mark since November 2023. United Kingdom bonds also hit a new 18-year peak at 5.25%.
Government bond yields serve as a benchmark for asset prices across financial markets. Rising yields lead to higher mortgage borrowing costs for consumers and create difficulties for governments as interest expenses escalate.
Michael Metcalfe, head of macro strategy at State Street, noted that multiple factors are impacting the market simultaneously. Among these, increasing energy prices are prompting investors to bet on potential interest rate adjustments, which in turn drives up short-term bond yields.
"The fiscal outlook for many countries is also causing concern. France and the United Kingdom are soon to release budget information. Therefore, there are not many positive factors currently," Metcalfe stated.
Technology giants aggressively selling bonds to raise capital for the artificial intelligence (AI) wave is also adding pressure to the government bond market. Naka Matsuzawa, a macro strategist at Nomura Securities, explained that technology corporations are willing to pay high interest rates, pushing market yields upward. However, the current question is whether economic growth can increase proportionally to help economies cope with higher interest rate environments.
Bonds have been under pressure since the Middle East conflict erupted in late February. However, yields have accelerated recently as investors grow concerned about the debt burden in major economies, including the United States.
Governments are borrowing heavily due to soaring expenditures during the pandemic and the conflict in Ukraine. They also face challenges from aging populations, rising social security costs, and increased defense investment needs.
"Investors are pushing yields higher to protest large government budget deficits," said Ed Yardeni, president of Yardeni Research. He predicts that if the US 10-year government bond yield reaches 5%, Secretary of the Treasury Scott Bessent will issue more short-term bonds to repurchase long-term ones, aiming to reassure the market.
Last month, the US Department of the Treasury intervened in the market to cool long-term bond yields. However, the effect was short-lived, with the US 30-year government bond yield returning close to its 19-year peak.
Rising energy costs are expected to continue challenging economies in the coming period, prompting investors to anticipate potential interest rate hikes. Brent crude oil prices are currently at a one-month high after the United States and Iran continued to exchange attacks in recent days. Natural gas prices in Europe are also at their highest since early 2023.
Federal Reserve (Fed) Chair Kevin Warsh acknowledged last week that the process of curbing inflation is still insufficient. This increases the likelihood of the Fed raising interest rates in September. The European Central Bank (ECB) is also expected to raise interest rates next week.
