Global bond yields scale multi-decade highs

Global government bond yields surged to multi-decade highs at the end of a turbulent week, driven by a sharp sell-off that pushed borrowing costs in the United States and Japan to levels unseen since before the 2008 financial crisis. US 10-year Treasury yields eased slightly to around 5.16% on Friday, after hitting a peak of 5.2297% last seen in 2007. The 30-year yield peaked at 5.5319%, the highest since 2004, before easing as falling oil prices provided some relief for bond markets.

Japan witnessed a similarly dramatic increase, with its benchmark 10-year government bond yield reaching 3.121%, its highest level since 1996. This marked a significant rise despite the Bank of Japan raising its policy rate this month to around 1.25%, effective from September 24th. The central bank's decision to withdraw monetary accommodation amid persistent inflation pressures led to a sharp rise in yields as bond prices fell.

The sharp rise in yields reflected heavy selling by investors, increasing financing costs for governments and businesses and accelerating the transmission of tighter monetary policy into mortgages, corporate debt, and other forms of credit. The pressure on bond markets was global, not confined to the US, as five of the G10's leading central banks raised interest rates in September. Policymakers' concerns about inflation risks have forced investors to reassess their expectations for quick declines in borrowing costs.

Energy prices played a crucial role in driving the bond market turbulence, particularly after a surge in oil prices due to geopolitical tensions in the Middle East. This renewed the fear of higher fuel and transport costs feeding into broader inflation, lowering the appeal of fixed-income securities and increasing the expectation that central banks may maintain restrictive policies for longer.

However, oil prices fell by roughly 3% on Friday as hopes of progress towards a US-Iran truce emerged, helping stabilize Treasuries and causing modest declines in some yields. Nevertheless, the week's dramatic repricing in bond markets remained evident, with the ICE BofA MOVE Index, a widely-followed measure of US bond-market volatility, jumping around 30% over the week.

Federal Reserve policy expectations shifted as markets priced the possibility of further rate increases. The Fed raised its target range by 25 basis points to 3.75%-4.00% this month, reflecting concerns about inflation risks stemming from energy costs and a resilient economy. Higher domestic yields in Japan have made Japanese bonds more attractive compared to overseas assets, potentially influencing international capital flows at a time when US and European governments face substantial financing needs.

The yen strengthened against the dollar on Friday, with the US currency falling to around 157.22 yen. Despite this, equity markets remained comparatively resilient, with US shares advancing on hopes for artificial intelligence companies, while global equity indices also rose.