Global Bond Market Volatility: A Tale of Fear and Concern

Global bond traders have been dealt a dizzying card this week, as the debt market experienced both the highest and lowest points of the year so far. Volatility in long-dated borrowing costs has investors scratching their heads, and wondering if the world economy is on the cusp of an inflation-led debt crisis or if the US is heading towards a recession that will drag the rest of the world down with it. Weak job growth in the US and revisions that showed employment contracted in June sent investors scrambling back into government debt, while earlier in the week, worries over profligate fiscal policy had them dumping the same assets. Eric Lonergan, a hedge fund manager at Calibrate Partners, points out that the debt market gyrations debunk most prevailing narratives about public debt levels.

Key Takeaways:

• The global bond market has experienced record volatility this week, with long-dated borrowing costs hitting multi-decade highs and then sharply falling.
• The UK's 30-year bonds, which peaked at 5.7 per cent, had fallen to 5.52 per cent by the end of the trading week.
• Bond yields fell as investors reversed their bond selling and piled back into government debt after weak job growth in the US.
• The Debt Management Office cancelled a scheduled auction for 30-year bonds, but successfully borrowed by issuing ten-year gilts, raising £14 billion at a yield of 4.86 per cent.
• The week's turmoil had echoes of a similar bond sell in January, which was driven by concerns over the Trump administration and French government instability.
• Japan's interest rates, which have been near zero for four decades, are expected to rise in the next year, affecting bond valuations globally.
• The US is poised to cut interest rates for the first time this year to support its flailing labour market, which could boost bond flows.
• Bond yields have become more attractive, particularly in a low-risk environment, as investors seek real yields and hedge against recession risks.

Statistics:

• Long-dated borrowing costs in the UK peaked at 5.7 per cent before falling to 5.52 per cent by the end of the week.
• The yield on Japan's 30-year debt has risen from 2.3 per cent to 3.2 per cent this year.
• The US Federal Reserve has cut interest rates five times over the last year, with its average annual rate now at 1.42 per cent.
• Global bond funds have seen a surge in inflows as investors seek safe-haven assets amidst recession fears.
• 71.4% of participants in a recent Pimco survey expect global interest rates to rise over the next year.

Sources:

• Mehreen Khan, Global bond traders are used to volatility but even they have been run ragged this week as the debt market experienced both the best and worst days of the year so far. By Mehreen Khan, Financial Times.
• Mehreen Khan, Mehreen Khan is a business writer at the Financial Times, where she covers asset management, equities and commodities.