Global bond rout gathers pace as Fed rate-hike bets rattle markets

Global bond markets are experiencing a rapid selloff, propelled by expectations of further interest rate hikes from the Federal Reserve, as reinforced by robust US economic data and subdued demand at recent debt auctions. Treasury yields across the curve have surged to their highest levels in nearly two decades, with the 10-year yield settling at 5.12 per cent following a 15-basis-point increase on September 23, marking the biggest jump since the 2025 tariff announcement by President Donald Trump.

In Asia-Pacific, bonds fell sharply, with Japan, Australia, and New Zealand experiencing significant declines. The US 30-year bond yield edged near the 5.44 per cent level, its highest in over two decades. The Bloomberg gauge of the US dollar approached levels last observed in July, reflecting traders' anticipation of additional Federal Reserve tightening measures following last week's initial rate hike since 2023.

While oil prices saw a slight dip, Brent crude pared a recent rally to trade about 0.9 per cent lower at around US$102.20 a barrel. US stocks, however, did not gain much support from this development, with Asian shares mirroring Wall Street's downward trend and equity-index futures hinting at potential losses extending to Europe.

The surge in Treasury yields, with the average yield on global government debt nearing 4 per cent, has intensified market bets on further Federal Reserve rate hikes. "This signals we've entered a genuine re-tightening cycle," stated Tony Miano at Wells Fargo Investment Institute. "Higher discount rates for equities, mortgage, and corporate borrowing costs, and a higher hurdle for risk assets are on the horizon."

The market now anticipates three-quarter-point hikes over the next two years, potentially pushing the Federal Reserve's target rate to a range of 4.75 per cent to 5 per cent. Fed Chair Kevin Warsh affirmed the earlier decision to increase borrowing costs to a range of 3.75 per cent to 4 per cent, marking a departure from earlier accommodative policies. Fed Governor Michael Barr suggested further rate hikes are likely to be necessary to bring inflation back to the central bank's 2 per cent target.

Meanwhile, gold's appeal waned as interest rates rose, with the commodity falling 1.7 per cent to around US$4,290 an ounce. US diesel futures surged as the Trump administration negotiated a two-month extension to the trade truce with China, although substantive progress remains to be confirmed. In Japan, the 10-year yield reached its highest level since 1996, while Australia and New Zealand saw the steepest and biggest increases in bond yields, respectively, since early March.

Despite the uncertainty, some analysts see potential opportunities for bond investors as yields reach attractive levels.