We are witnessing a once-in-a-generation bond market sell-off.
asserted
We → witness → off
It's the main event on global financial markets at present, which also means there are implications for millions of Australians.
asserted
which → mean → Australians
For the uninitiated, a bond is generally either a corporate or government IOU, and these debt securities can be traded by big investment groups and everyday retail investors.
Generally considered safer than the volatile share market, the bond market provides an economic canary in the coal mine because it can foreshadow financial market stress.
The bond market itself is a vehicle for investors to measure and weigh inflation, as well as broader economic risks.
Politicians can spin a big budget deficit or their reasons for engaging in military conflict, but the bond market provides a clinical assessment of the fallout of such actions for everyday workers.
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market → trade → workers
And the market is screaming economic trouble ahead.
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market → scream → trouble
US bond-yields spell debt market 'freak out'
US government debt or "Treasuries" were sold off sharply last week.
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debt → spell → freak
Put simply, investors were dumping these US government securities and those buying were demanding higher returns for their investments.
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those → Put → investments
Bond yields rise when their prices fall.
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prices → rise → ?
Rising yields mean people are losing faith in the borrower's capacity to pay.
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people → rise → capacity
They can also mean investors are looking for compensation as returns are eroded by inflation.
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returns → mean → inflation
The US 10-year and 30-year government bond yields are now around two-decade highs — both are close to breaching 2006 and 2007 peaks, with 2004 the highest before that.
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2004 → breach → that
The September Flash Composite PMI, or Purchasing Managers' Index (which points to the health of the US manufacturing sector) surged to 58.4 from 56.0 in August — the highest reading since July 2021 and well above the 55.3 consensus.
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which → point → consensus
Crucially, the data showed input prices growing at the fastest pace in four years.
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prices → show → years
That means it's getting more expensive to make stuff and generally prices are going to rise faster.
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prices → mean → stuff
This, combined with escalating tensions in the Middle East, rising oil prices and fears of overspend by big tech firms on AI and data centres, meant the debt markets started to freak out.
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markets → combine → AI
Germany, Japan dealing with rising yields
Make no mistake, this is a global financial phenomenon.
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this → deal → mistake
The world's biggest economies, and their governments, are grappling with higher interest payments as spending demands surge.
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demands → grapple → payments
Germany's finance agency said on Thursday it expects federal borrowing to hit a record €525.5 billion ($US598 billion) in 2026 and to rise further next year, driven largely by rising refinancing needs and growing requirements for special funds.
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borrowing → say → funds
The yield on Germany's benchmark 10-year Bund briefly rose above 3.6 per cent this month, its highest level in 17 years.
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yield → rise → years
Japan's 10-year bond yield hit its highest since 1996 on Thursday.
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yield → hit → Thursday
Commentary from the world's most influential central banks only added fuel to the bond fire.
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Commentary → add → fire
One of the US Federal Reserve Governors, Michael Barr, said last week "further policy adjustments are likely needed" to return inflation to the two per cent target in a timely way, adding that risks to achieving the inflation goal had increased.
Markets now price approximately a 66 per cent probability of a further 25 basis points (0.25 percentage point) hike at the October US Federal Open Market Committee (FOMC) meeting.
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Markets → say → meeting
"It is tough to pick the peak [for interest rates]," the CBA's head of market strategy and rates research Adam Donaldson said.
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head → pick → strategy
"Inflation remains under pressure due to the war in Iran and solid economic growth.
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Inflation → remain → Iran
"But we do think that US bond yields are somewhere near their peak,"he said.
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yields → think → peak,"he
Economic veterans cautious about the months ahead
Veteran market commentator Marcus Padley runs a managed fund on behalf of clients.
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Padley → run → clients
He remains increasingly cautious about the weeks and months ahead on financial markets.
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He → remain → markets
"SocGen [sic] described the bond market sell-off as a meltdown," Mr Padley wrote on social media.
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Padley → describe → media
"The biggest risk in the global equity market, since US debt hit $40 trillion, has always been a bond market meltdown.
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debt → hit → trillion
Overnight, we have seen what it looks like when it starts."
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it → see → what
Bond levels not seen in two decades
We saw significant central bank and government financial support in the wake of both the global financial crisis and the COVID-19 pandemic.
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We → see → crisis
Since then, however, ultra-low interest rates have fuelled borrowing and spending.
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rates → fuel → borrowing
It's helped generate inflation and it has become incredibly challenging for both governments and central banks to manage.
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governments → help → inflation
"You assume that at some point all the powers of the United States will step in to make sure nothing precipitous happens, but it is obviously uncomfortable for equity investors and endorses
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it → assume → investors
our current cash stance,"Marcus Padley said.
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Padley → say → ?
If we see a significant financial event like a sovereign government debt default, a hedge fund collapse or a major tech company insolvency, it's assumed a bailout will be swiftly engineered.
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bailout → see → default
The risk is though that such a rescue will either be ignored by the markets or not eventuate at all.
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rescue → ignore → markets
In any event, the ABC asked AMP's head of investment strategy what such an event would look like.
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event → ask → what
"I think worst case would be [a US 10-year-bond yield] around six per cent … and a bit more in Australia, ie back to around late 1990s/early 2000s levels," Dr Oliver said..
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Oliver → think → levels
"Hopefully we won't get there but at this rate it's possible especially given the worry list for bond investors around high oil prices, high inflation, high public debt levels, rising corporate borrowing, erratic US policy making and rising Japanese bond yields."
The multi-trillion-dollar question is: how far are bond markets willing to push governments and big corporates to get their financial houses in order?
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houses → get → order
Because until the inflation threat bearing down on the world economy dissipates, and productivity remains subdued, the bond market will keep pushing the envelope.
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market → bear → envelope
…and 3 more, not listed.
The Aporia
