Global bond rout gathers pace as Fed rate hike bets rattle markets
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US Federal Reserve chairman Kevin Warsh faces pressure for another interest rate hike following the sharp rise in government bond yields.
PHOTO: AFP
- Global bond yields surged to their highest levels in nearly 20 years due to strong US economic data and weak demand at Treasury auctions.
- Markets reacted with sharp losses in Asia-Pacific equities and rising US dollar, amid expectations of further Federal Reserve interest rate hikes.
- The US-China trade truce extension eased some uncertainty, but bond markets focus remains on Fed rate paths and potential higher borrowing costs.
AI generated
NEW YORK – A global sell-off in bonds intensified, jolting investors as robust US economic data and weak demand at a debt auction drove Treasury yields across much of the curve to their highest levels in almost two decades.
The bruising losses on Wall Street swept into the Asia-Pacific, with bonds sliding in Japan, Australia and New Zealand.
The US 10-year yield steadied to 5.11 per cent in Asian trading, after a 15-basis-point surge on Sept 23, the biggest since the turmoil triggered by President Donald Trump’s April 2025 tariff announcement. Weak demand at an auction of five-year notes had pushed the yield above 5 per cent for the first time since 2007.
Yields on the 30-year Treasury bond were just shy of the 5.44 per cent level, which was the highest in more than two decades.
A Bloomberg gauge of the US dollar hovered around levels last seen in July, as traders priced in more interest rate hikes by the US Federal Reserve.
While some relief came from oil, with Brent paring a rally on Sept 23 to trade 0.7 per cent lower at around US$102 a barrel, stocks barely benefited.
Asian shares tracked Wall Street benchmarks lower and fell 0.6 per cent, and equity-index futures indicated losses may extend to Europe as well.
The prospect of higher energy costs colliding with a still-strong US economy is adding pressure to a bond market already rattled by weak auction demand and concerns that interest rates will stay elevated. As Treasury yields surged – the average yield on global government debt rose to within a whisker of 4 per cent – traders ramped up bets on further Fed tightening following last week’s first rate increase since 2023.
“This is the market telling us we’ve entered a genuine re-tightening cycle,” said Tony Miano from Wells Fargo Investment Institute. “The entire curve is repricing at once, which means higher discount rates for equities, higher mortgage and corporate borrowing costs, and a higher bar for risk assets.”
Swaps now fully reflect three quarter-point hikes over 2027, with significant hedging for a fourth. If realised, that would take the central bank’s target rate into a range of 4.75 per cent to 5 per cent.
Officials raised borrowing costs last week to a range of 3.75 per cent to 4 per cent, a move US Fed chairman Kevin Warsh said removed a “dose of accommodation”. Fed governor Michael Barr said further rate hikes are likely needed to return inflation to the central bank’s 2 per cent target.
Markets elsewhere
In other corners of the market, gold held its losses from the previous session, when bullion fell 1.7 per cent to about US$4,290 an ounce. The non-yielding commodity’s appeal lessens as interest rates rise.
Equities in mainland China fell over 1 per cent, even as US Treasury Secretary Scott Bessent announced that the US and China had sealed a two-month extension to their trade truce.
Some analysts said the agreement removes an immediate source of uncertainty, but that material progress needs to be seen to dispel further overhang.
US diesel futures jumped as the Trump administration worked with refiners to voluntarily curb diesel exports as an alternative to banning overseas shipments.
In Japan, the 10-year bond yield climbed to the highest since 1996. Its Australian counterpart posted the steepest increase in almost two weeks, while New Zealand’s equivalent recorded its biggest jump since early March.
The sharp rise in yields has put the Fed’s rate path back at the centre of attention. In projections released after last week’s decision, officials pencilled in another increase before the end of 2026, according to the median forecast.
The median projection for 2027 showed no additional hikes in 2027, though eight officials saw the benchmark rate ending the year half a percentage point above current levels.
“After the monetary policy meetings, there was a sense that bond yields might settle down, so the speed of the latest rise feels quite rapid,” said Ikuo Mitsui, a fund manager at Aizawa Securities. “That said, yields are reaching fairly attractive levels, and bond investors may now start looking for opportunities to put money to work.” BLOOMBERG