Global sovereign bond markets are on track for their worst month in years, as soaring energy costs and an AI-driven growth boom push investors to bet that interest rates will stay higher for longer. Two-year US Treasury yields have jumped almost 60 basis points in September, and 10-year yields have topped 5% for the first time since 2007.
The world's biggest sovereign bond markets are heading for their worst month in years, as soaring energy costs and an AI-driven growth boom push investors to bet that interest rates will stay higher for longer. Two-year US Treasury yields have surged almost 60 basis points in September, the biggest monthly jump since early 2023.
Two-year borrowing costs in France, Germany, Britain and Australia are set for their biggest monthly jumps since March, when the Iran war triggered a new energy shock. Japanese government bond yields are pinned near multi-decade highs. Societe Generale's head of corporate research for FX and rates, Kenneth Broux, said the market is adjusting to a realization that the energy and inflation story will not fade soon.
Yields surge across major markets
Sovereign bond markets matter because they set the cost of loans for businesses and consumers, including mortgages, so central banks watch them closely. Data last week showed the rate on the most popular US home loan has risen to its highest level in more than two years. Ten-year Treasury yields, meanwhile, have pushed above 5% for the first time since 2007, on pace for the biggest monthly jump since 2022 with a rise of around 50 basis points.
The ICE BofA MOVE Index, a measure of bond-market volatility, has jumped almost 30% in September, the largest increase since March. That volatility has caught some investors out, but others see an opportunity. Florian Ielpo, head of macro and multi-asset portfolio management at Lombard Odier Investment Managers, said he has turned more positive on government bonds given the high yields on offer.
Tech bond sales compete with Treasuries
Ielpo expects government borrowing costs to stay elevated for some time, as the market competes with bond sales from big technology firms funding AI investment. The value of bond sales from hyperscalers has more than doubled this year to over $200 billion, according to LSEG data.
Dealmakers say they can live with funding costs at their highest since the global financial crisis. Warburg Pincus CEO Jeffrey Perlman, speaking at a conference in Singapore, said funding at current levels still works: "Deals can work at a 5% 10-year."
Fiscal risk clouds the outlook
French budget talks and a first budget from new UK finance minister John Healey are likely to keep the two economies' fiscal troubles in focus. France's 10-year bond yield has jumped more than 50 basis points this month, the biggest monthly move since 2022, pushing its gap over German Bund yields to the widest since 2012. Political tensions in France, including rising support for far-left presidential contender Jean-Luc Mélenchon in opinion polls, have added to the moves, according to Nomura senior European economist Andrzej Szczepaniak.
Across the Atlantic, a September rate rise has boosted the Federal Reserve's inflation-fighting credentials, but uncertainty over the Treasury's next steps to rein in borrowing costs remains in focus. October will bring new tests in the form of US jobs and inflation data, French budget talks, the UK budget, and likely more bond issuance from tech firms.
Source: Investing.com
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