Global bonds are heading toward their worst monthly performance in years, driven by deteriorating government finances, heavy debt issuance, and persistent inflation pressures stemming from the seven-month-old US-Israeli war on Iran.
Global Bond Markets Face Steep Monthly Losses
Benchmark 10-year US Treasury yields hovered just below their highest level since June 2007 at 5.209% in early European trading. According to market data, yields are set for a rise of more than 45 basis points for the month, marking the largest move in about two years. Bond yields move inversely to prices.
In Europe, 10-year German and French government bonds hit 17-year and 18-year highs. They are on track for quarterly increases of about 70 basis points and 120 basis points, respectively. Meanwhile, Japanese 10-year government bond yields hovered near multi-decade highs, tracking for a 38-basis-point jump for the quarter.
New York Federal Reserve President John Williams pushed back against expectations for earlier policy tightening, causing the 2-year Treasury yield to dip 1.9 basis points to 4.870%. Despite the slight daily dip, the 2-year yield remained more than 50 basis points higher for the month.
Equity Markets Defy Surging Borrowing Costs
Despite the sharp rise in sovereign borrowing costs, global stock markets have shown resilience, supported by strong earnings growth and continued enthusiasm for artificial intelligence. Europe’s pan-regional STOXX 600 rose 0.6%, and while on track for a monthly loss of 1.4%, it remains broadly unchanged for the quarter.
In Asia, MSCI’s broadest index of Asia-Pacific shares excluding Japan rose 0.3%, though it faced a 1.1% monthly fall. Japan’s Nikkei jumped 1.9%, putting it up 0.6% for the month and down 4.7% for the quarter. South Korea’s Kospi headed for a monthly gain of 0.3% alongside a quarterly plunge of 19%.
“What was surprising to us was the sanguine reaction of the equity market where the growth in nominal GDP was driving earnings optimism,” said Mohammed Apabhai, Citi’s head of Asia-Pacific trading strategy, in a note. Apabhai added that US equity markets are reacting to rising bond yields outside of the tech space.
In China, the blue-chip CSI 300 index rose 0.3% but remained near a one-year low, putting the gauge on course for a 12% quarterly slump, its largest since the height of COVID-19 lockdowns.
Currency and Commodity Market Movements
The US dollar tracked toward a monthly gain of roughly 2%, aided by rising US yields. The euro traded just above a 16-month low at $1.1346, headed for a 2.3% monthly loss under pressure from a global energy shock and political risk in Europe. Sterling gained 0.2% to $1.326 but faced a 2.1% monthly loss.
The Japanese yen added 0.2% to 156.95 per dollar, eyeing a monthly gain of 1.7% amid investor caution regarding potential joint intervention by Tokyo and Washington. In commodities, US crude held flat at $89.41 a barrel while Brent eased 0.1% to $102.47, with both benchmarks set for monthly gains due to Middle East supply disruption concerns. Spot gold added 0.44% to $4,199.28 an ounce.
Market Context: Yield Levels and Equity Risks
“We have reached yield levels that are becoming genuinely significant,” said Carlo Franchini, head of institutional clients at Milan-based Banca Ifigest. “The temptation to move out of equities could become an issue.” Franchini noted he is not yet taking profits on stocks, betting equities will remain supported through October if easing tensions around the Strait of Hormuz help lower oil prices.
Frequently Asked Questions on Global Market Trends
Why are global bond yields rising?
Global bond yields are rising due to deteriorating government finances, a heavy volume of debt issuance, and persistent inflation driven by elevated energy costs from the seven-month-old US-Israeli war on Iran.
How are stock markets reacting to higher borrowing costs?
Stock markets have remained largely resilient despite surging bond yields, bolstered by strong earnings growth, strength in the global economy, and strong enthusiasm for artificial intelligence, particularly outside the tech sector.
What is driving the US dollar’s performance?
The US dollar is on track for a monthly gain of roughly 2%, primarily aided by the sharp rise in US Treasury yields.
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