A global bond selloff is deepening as investors reduce expectations of a Fed rate cut

A selloff in global bond markets is accelerating, fueling concerns over government finances and raising the specter of higher borrowing costs for consumers and businesses around the world.

Bond yields rose mostly globally with the 10-year US Treasury yield touching a fresh 14-month high of 4.799% on Monday as investors reassess the pace at which the Federal Reserve can lowers interest rates.

In the UK, 30-year walnut yields are standing at their highest level since 1998, and the country’s 10-year yield recently reached levels not seen since 2008.

Japan, which has been trying to normalize its monetary policy after ending its negative interest rate regime early last year, has seen the yield on its 10-year government bond rise above 1%, hit a 13-year high on Tuesday, LSEG data showed.

In the Asia-Pacific, India’s 10-year bond yields rose the most in over a month on Monday and are near 2-month highs at 6.846%. New Zealand and Australian 10-year government bond yields were also near two-month highs.

The only exception? China. The country’s bond market has been volatile even as authorities have sought to calm the rally. China’s 10-year bond yield fell to a record low this month, prompting the country’s central bank to suspend its government bond purchases last Friday.

Bonds have been rocked by a combination of factors, market watchers told CNBC.

Investors are now anticipating fewer rate cuts from the Fed than before, and are looking to be adequately compensated for the risk of owning bonds maturing well into the future, as they worry about large government budget deficits.

Last month, the Federal Reserve predicted just two rate cuts in 2025, having previously indicated twice as many cuts. A hotter-than-expected US jobs report on Friday made the Fed’s rate cut path more uncertain, analysts said. Nonfarm payrolls rose by 256,000 in December, outpacing the 212,000 added in November and beating the Dow Jones consensus forecast of 155,000.

The U.S. economy is strengthening faster than anticipated, meaning the Federal Reserve has little or no room to cut interest rates, and the bond market is reflecting that, said Ben Emons, founder of FedWatch Advisors. .

Bond yields typically rise when interest rates rise. Bond yields and prices move in opposite directions.

The odds of just a single cut this year rose after the jobs report, according to CME Group’s FedWatch gauge.

“After [last week’s] employment ratio we’re only pricing in somewhere between one and two rate cuts,” said Steve Sosnick, chief strategist at Interactive Brokers.

Additionally, elevated government deficits are also contributing to the bond selloff as more debt supply hits the market.

The US government reportedly recorded a deficit of $129 billion in December, 52% higher than a year ago. The UK’s public sector net debt – excluding public sector banks – stands at over 98% of its GDP.

UK nut markets are selling even higher for a similar combination of reasons, said CreditSights senior strategist Zachary Griffiths. “First of all [it’s because of the] concern about the fiscal situation, but the fall in sterling is also fueling inflation concerns,” he added.

The implications of higher yields for governments and corporations are relatively simple, Sosnick said: “they’re not good!”

Higher yields increase the amount of money needed to be spent on debt service, especially in the case of governments running persistent deficits, analysts said.

Taken to an extreme, this is where the “bond vigilantes” come in and demand higher rates to take on these large debts, Sosnick said.

“Bond investors are sending a clarion call to the world’s fiscal authorities to control their budget trajectories, lest they succumb to additional anger,” said Tony Crescenzi, an executive vice president at Pimco.

Rising US yields also make it more difficult for some central banks to cut rates in the short term, HSBC Asia chief economist Frederic Neumann said on Monday, citing the Bank of England’s recent decision Indonesia to keep interest rates on hold as an example.

A broad devaluation of Asian currencies is also expected, another HSBC analyst said. The widening gap between government bond yields in Asia relative to the US is resulting in capital outflows from Asia as well as fewer inflows from the rest of the world into Asia.

It’s not just governments that are affected by higher bond yields. Borrowing costs for many businesses have been compared to government bonds, and as government bond yields rise, so do borrowing costs for companies.

As companies typically have to offer a higher yield than their corresponding government bonds to attract investors, the burden on them is likely to be higher.

Potential ramifications include lower profits or missed opportunities, Sosnick said, pointing to corporate bonds that generally have to offer higher rates than government debt.

Rising yields tighten borrowing costs, the dollar strengthens and stocks tend to fall, affecting consumer confidence, which then has a ripple effect on housing spending and retail sales, FedWatch Advisors’ Emons said. .

Market participants are now awaiting the inauguration of US President Donald Trump next week

The “real test” comes once Trump takes office next week, when a wave of executive orders related to tariffs and immigration restrictions is expected, industry watchers told CNBC.

Bond markets are experiencing a “buyers’ strike” at the moment, noted Dan Tobon, head of FX G10 Strategy at Citi.

“Because why take a leap of faith now, when you’re going to have a lot more information in just a few weeks? And so buyers hitting means that yields just continue to rise quite aggressively,” he said.

“If they are perceived as inflationary or as having negative consequences for the budget deficit, then the unrest is likely to continue,” he added. Conversely, if policies are relatively modest, bonds may stabilize or even reverse, he said