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Bond yields surge to multi-decade highs amid global sell-off
Long-term government borrowing costs have climbed to their highest levels in decades across major economies, driven by rising fiscal concerns and inflation fears that are reshaping bond markets. Japanese 30-year bond yields reached a record 3.28% on Wednesday, while UK gilt yields soared to levels unseen since 1998.
Japanese markets lead the sell-off
The sell-off began in Japan, where 30-year bond yields jumped eight basis points, hitting an unprecedented high. Meanwhile, 20-year yields reached their highest point since 1999. These moves reflect growing unease over Japan’s ballooning debt and expectations of tighter monetary policy from the Bank of Japan, despite sluggish economic growth.
European bonds under pressure
The ripple effects quickly spread to Europe. In the UK, 30-year gilt yields surged to 5.752%, surpassing levels seen during former Prime Minister Liz Truss's volatile tenure in 2022. Twenty-year gilt yields hit 5.597%, their highest since 1998. The British pound weakened sharply as investors questioned the fiscal discipline of the Labour government ahead of Chancellor Rachel Reeves' autumn budget.
Germany’s bond market also felt the strain, with 30-year yields reaching their highest since 2011. This comes as the country prepares for substantial increases in infrastructure and defense spending. In France, political uncertainty surrounding Prime Minister François Bayrou’s vote of confidence on September 8 exacerbated budgetary concerns, further pressuring French bond yields.
US treasury yields approach critical threshold
In the United States, 30-year treasury yields climbed to 4.98%, nearing the psychologically significant 5% mark. This level hovers close to the 52-week high of 5.15% reached in May. The Federal Reserve faces a delicate balancing act between supporting the labor market and anchoring inflation expectations, partly influenced by tariffs.
Structural shifts in bond markets
Deutsche Bank analysts Jim Reid and Henry Allen have described this period as one of the worst on record for nominal US 10-year yields, driven by concerns over debt sustainability and inflation. Foreign ownership of US treasuries has dropped to 24.8%, the lowest since 2003, while institutional demand has weakened amid inflation risks and regulatory changes.
Federal Reserve Governor Christopher Waller noted that inflation expectations remain anchored but acknowledged that tariffs are visibly impacting consumer prices. The Fed anticipates underlying inflation to stabilize near its 2% target once temporary effects wane, though bond markets remain unconvinced.
Political risks heighten market stress
France faces heightened vulnerability as Bayrou's government struggles to secure support for a proposed €44 billion austerity plan aimed at reducing the budget deficit from 5.8% of GDP to under 4.6%. Opposition parties have signaled plans to reject the proposal, pushing French bond spreads relative to German bunds to roughly 80 basis points.
Market experts warn that the combination of fiscal pressures, political instability, and inflation concerns could fuel further volatility. September, historically the worst month for long-term bonds, may see additional declines, with key economic data, including the US jobs report, set to influence market dynamics in the coming days.