Bond Yields Are Surging Around the World As Investors Fear Big Deficits

The sell-off that’s hit the bond market in recent weeks isn’t just a US phenomenon — in fact, it’s even more pronounced in other countries this year.

Bond investors globally seem jittery, in part due to concerns about deficit spending and fears that governments will continue to spiral deeper into debt.

This was on display this week when key US bond yields jumped as politicians debated a sweeping budget bill that economists think could add trillions to the US deficit.

The 10-year Treasury yield spiked as high as 4.61% this week, up 63 basis points from its low in early April. The 30-year Treasury yield climbed as high as 5.13%. That’s up 74 basis points from its April low and 31 basis points from the start of the year.

However, the 10-year Treasury is nearly flat for the year despite recent gyrations, and observers should look globally to get a better sense of the bond market’s situation.

The yield on the UK’s 30-year government bond spiked as high as 5.54% this week, up 40 basis points year-to-date.

The UK is on track to post a budget deficit equivalent to $185.5 billion this fiscal year, slightly lower than last year’s levels, according to an estimate from its Office for Budget Responsibility. It expects the budget to remain in a deficit through the end of the decade.

Germany’s 30-year bond rose as high as 3.16% this week, up 57 basis points this year.

According to provisional estimates from its Federal Statistical Office, Germany’s government posted a budget deficit equivalent to $134.5 billion in 2024, up $16.9 billion from the prior year. Interest payments on its debt also climbed 24% last year.

Finally, Japan’s 30-year bond yield rose as high as 3.16% this week, up 89 basis points since January and touching its highest level since 1999, according to Bloomberg.

The move higher in global yields is a sign that the bond market is dismayed at high levels of government borrowing and deficit spending.

“To be honest, it’s not only a US problem. We’re running huge deficits pretty much everywhere, whether that be in the United States or here in the UK,” Michael Brown, a senior research strategist at Pepperstone, told Business Insider. “I think the big issue for market participants is we’ve known that this has been a problem for years.”

Government debt makes investors nervous for several reasons.

1. Limited funds. Higher borrowing means governments must pay more to service their debt, leaving less money for them to spend on other things that can help grow the economy and prop up employment.
2. Inflation and interest rates. Debt is inflationary. If inflation rises due to heavy government borrowing, interest rates could rise as central banks try to tame high prices. Higher inflation and interest rates impact consumers and businesses and ultimately harm economic growth.

Ultimately, global bond markets are telling governments they should stop borrowing like they did in the era of ultralow interest rates that lasted from the post-2008 era to the end of the pandemic.

The move in Japanese bond yields, in particular, is concerning for investors. After a long period of low rates, Japanese bond yields have soared on concerns for the country’s fiscal health.

That’s jeopardized the “carry trade,” which entails investors borrowing yen at ultra-low rates and then swapping into dollars to buy US stocks and bonds. As rates rise in Japan, those levered positions often have to be unwound and assets sold off.

Higher Japanese yields also cause domestic investors to dump their holdings of US Treasurys and return to Japanese bonds that now offer comparable yields. Deutsche Bank flagged this dynamic this week, with the bank’s George Saravelos calling it “the single most important market indicator of accelerating US fiscal risks.”

“We would argue the JGB sell-off is a bigger problem for the US treasury market: by making Japanese assets an attractive alternative for local investors, it encourages further divestment from the US.”

Others have echoed that this week, stating that the situation in Japan should be a focus for investors.

“If like us you believe BoJ QE has been pivotal to US bubble equity valuations, then the ongoing JGB rout is a game changer,” Albert Edwards, a strategist at Société Générale, wrote in a note this week.

Higher yields in the US also ultimately impact stock prices, Brown says.

“It’s too early to say for sure, but I wonder whether we could be getting close to the beginning of a classic ‘bonds break stocks, until stocks break so much that they fix bonds again’ cycle,” he said in a note on Friday.