Government borrowing costs across several major economies climbed to their highest levels since the 2008 financial crisis on Monday. Investors are increasingly concerned that the escalating conflict in the Middle East will sustain high inflation, forcing central banks to maintain aggressive interest rate policies.
The impact is being felt globally, with debt costs rising in the US, UK, France, Germany, and Japan. In the United States, long-term borrowing costs reached levels not seen since 2007, the year preceding the credit crunch. Specifically, the 30-year Treasury yield climbed to 5.29%.
European markets are facing similar pressures. France’s 30-year bond yield hit 4.8558%, its highest point since September 2008, while its 10-year yield reached a peak not seen since June 2009 at 4.0516%. Meanwhile, German 10-year bond yields rose to 3.2138%, the highest level since 2011. Money markets currently estimate an 85% probability that the European Central Bank will implement another rate hike in September.
The volatility in bond markets is closely tied to the geopolitical situation. Oil prices jumped 6% last week, and Brent crude continued to rise on Monday as the US and Iran remain deadlocked. Tensions were further exacerbated by Donald Trump, who warned he would bomb Oman if it “gets in the way” of his efforts to resolve the war.
Japan’s bond market is also under significant strain, with the 10-year government bond yield hitting a three-decade high of 2.93%—the highest level since September 1996—before retreating slightly following weaker-than-expected GDP data for the April-June period. Analysts anticipate the Bank of Japan may raise rates in September to stabilize the yen.
Axel Rudolph, a chief technical analyst at IG, noted that persistent weakness in the yen and inflationary pressures are building a strong case for intervention. He added that uncertainty regarding the funding of proposed food tax cuts has introduced further fiscal anxiety, leaving the Bank of Japan in a difficult position as it attempts to balance economic support with inflation control. The report also notes that the yield, or interest rate, on 30-year French bonds rose to its highest level since September 2008 at 4.8558%, up one basis point (0.01 percentage point), LSEG data showed. The report also notes that up 1.5bps, the equivalent German bond rose to its highest yield since 2011 at 3.2138%. The report also notes that concerns over rising prices and government spending pushed up the cost of debt issued by Paris, Berlin, Washington DC, Tokyo and London as investors fretted that rising prices would push up interest rates. The report also notes that and the BoJ may soon have to choose between supporting a fragile economy and containing inflation.”, japan’s bond market is clearly becoming less forgiving.
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