Violent sell-off, total rout, what has happened in the global bond market?

The global bond market is experiencing its most brutal round of sell-offs in nearly two decades.

The yield of Bloomberg Global Aggregate Government Bond Index has risen for four consecutive trading sessions, standing at 3.72%, the highest level since mid-2008 — this is not a partial fluctuation in a single market, but a systemic repricing sweeping across the United States, Japan, Australia, and even the entire G10.

On Tuesday (September 1), the yield on the 10-year U.S. Treasury note once rose to 4.78%, the highest level since January 2025;

The 10-year Japanese government bond yield hit 3% on Tuesday, the first time since 1996.

The yield on Australian government bonds of the same maturity also rose to the highest level since 2011, while the 10-year UK government bond yield climbed to the highest level since June 2008, up 7 basis points to 5.223%.

The logic driving this round of sell-offs is closely linked: Federal Reserve Chair Kevin Warsh reaffirmed his anti-inflation stance at the Jackson Hole Symposium, the escalation of U.S.-Iran tensions pushed Brent crude back above $90 per barrel, coupled with the fact that the size of U.S. national debt has exceeded $40 trillion and the fiscal deficit continues to expand, the market's pricing of "high interest rates maintained for a longer period" is undergoing full repricing.

However, the more critical issue is that the era of cheap funds that underpinned global asset pricing over the past decade or more may have come to an end. Analysts believe that a 5% U.S. Treasury yield may not be the end, but the starting point of the new normal.

The Trigger: Warsh's Hawkish Remarks Combined with Oil Price Shock

The direct trigger for this round of sell-offs is the simultaneous outbreak of two forces.

In his speech at Jackson Hole last Friday, Warsh reaffirmed his stance of completely suppressing inflation — this marks the fifth consecutive year that the Federal Reserve has failed to keep inflation within its target level. After the speech, the market's implied probability of a Fed rate hike in September in the interest rate swap market jumped from 34% to 65%.

At the same time, the U.S.-Iran conflict has escalated again, and the market is worried that the energy passage of the Strait of Hormuz will be continuously disrupted, pushing Brent crude oil prices up 1.2% to around $91.55 per barrel. Higher oil prices directly strengthened inflation expectations and further pushed down bond prices.

According to reports, multiple current and former U.S. and Iranian officials said that the Middle East conflict is expected to last for several months. This means that the upward pressure on energy prices is difficult to dissipate in the short term, and the uncertainty of the inflation path will continue to plague the bond market.

The superposition of the two forces has suddenly intensified the pressure on the bond market. Both Barclays and Societe Generale revised their interest rate forecasts after Warsh's speech, incorporating the previously unanticipated rate hikes in September and December into their baseline scenarios.

Core Logic of U.S. Treasuries: Uncontrolled Deficit and Real Interest Rate Repricing

The rise in U.S. Treasury yields has deeper structural drivers than geopolitics.

U.S. national debt exceeded $40 trillion in August, and the supply pressure in the Treasury market continues to intensify. At the same time, large technology companies are issuing large-scale long-term corporate bonds to finance artificial intelligence infrastructure construction. About $200 billion of high-grade corporate bonds are expected to flood into the market in September, competing with government bonds for the same pool of funds.

According to MarketWatch, the U.S. nominal GDP growth rate has accelerated to about 6.6% year-on-year, but the real growth rate is only 2.1%, and the difference between the two mainly reflects inflation — the GDP deflator rose by 4.4% year-on-year. Historically, the 10-year Treasury yield has usually been higher than the GDP deflator, but the current spread between the two is at a historically low level, meaning there is still room for yields to rise.

More notably, this round of yield increases is mainly driven by real interest rates (real yields) rather than inflation expectations. This indicates that the bond market is not simply pricing for inflation, but demanding higher real returns — which is a fundamental repricing of the long-term equilibrium interest rate level of the U.S. economy.

According to MarketWatch, the nominal GDP growth rate is also faster than the money supply growth rate, and the velocity of money is rising, which is historically highly correlated with the rise of long-end interest rates.

According to reports, Treasury Secretary Bessent said on Monday that he and Warsh share the same position on the roughly $31.5 trillion Treasury market. The U.S. Department of the Treasury previously announced in mid-August that it would expand the scale of repurchases of 10-year to 30-year Treasury bonds, but analysts believe that the authorities' current goal may only be to stabilize yields, not to actively push them down.

Global Central Bank Tightening Resonance, the Era of Cheap Funds Is Coming to an End

Another core logic of this bond market sell-off is the end of the global era of cheap funds.

For a long time, the low yield of U.S. Treasuries has partially relied on the continuous inflow of cheap foreign capital from low-interest rate economies such as Japan and Europe. However, as major global central banks have successively tightened monetary policy, this logic is collapsing.

As overseas yields rise, the relative attractiveness of U.S. Treasuries to foreign investors declines, especially after accounting for currency hedging costs, further increasing the upward pressure on U.S. Treasury yields. Bloomberg strategist Mark Cranfield pointed out:

"G10 fixed income traders are paying increasingly close attention to Japanese government bonds, and Australian bonds are increasingly priced following JGBs rather than U.S. Treasuries. The current backdrop is extremely unfavorable: sticky inflation superimposed on huge fiscal deficits in the United States, Japan, the United Kingdom and France."

The shift in Japan is particularly critical. The Bank of Japan ended the world's last negative interest rate policy in 2024, after which Japanese government bond yields rose rapidly. The 10-year JGB yield was only about 1.5% a year ago, but now it has hit 3%, doubling its increase.

The share of international investors in monthly cash JGB transactions has risen from 12% in 2009 to about two-thirds. JGBs are re-emerging as an important option for global asset allocation, which means that part of the capital that previously flowed to U.S. Treasuries is returning.

At the same time, fiscal pressure cannot be ignored either. The government of Japanese Prime Minister Sanae Takaichi has launched an unprecedented fiscal expenditure plan, but has not yet clarified the financing plan for the food consumption tax cut, and concerns about fiscal sustainability have further pushed up JGB yields. In its initial budget application for the next fiscal year, Japan's Ministry of Finance recorded a record debt repayment cost of 36.6 trillion yen (about $230 billion).

Expectations of Interest Rate Hikes by Central Banks in the U.S., Japan, Europe, Australia and Other Regions Are Rising Fully

Amid the massive global bond market sell-off, the wave of global interest rate repricing continues to spread, and the market's bets on major central banks tightening monetary policy have risen significantly.

After the Jackson Hole Global Central Bank Symposium, according to Bloomberg data, the swap market's implied probability of a Fed rate hike in September has surged to 65% from 34% before Warsh's speech.

In addition, the interest rate swap market shows that a rate hike at the European Central Bank's September 10 meeting has been fully priced in, the probability of the Reserve Bank of New Zealand raising interest rates this week is 98%, the probability of the Bank of Japan raising rates on September 18 is 92%, and a rate hike in October has been fully priced in.

According to NHK, Japan's national broadcaster, U.S. Treasury Secretary Bessent met separately with Japanese Finance Minister Satsuki Katayama and Bank of Japan Governor Kazuo Ueda during the G20 Finance Ministers' Meeting on Monday. Bessent explicitly told both sides that Japan should raise interest rates next.

Later, in an interview with CNBC, Bessent said: "I have information that the market does not have, and I believe the Japanese government and the Bank of Japan will take action to push the yen higher." This is the clearest signal Washington has sent on Japan's monetary policy so far.

Dilin Wu, strategist at Pepperstone Group, pointed out that "the policy paths of major global central banks will be revealed intensively in the same month, creating a highly concentrated pricing window for the interest rate and foreign exchange markets."

Global Resonance: Chain Reaction from Australia to Europe

This sell-off has evolved into a globally synchronized resonance, rather than an isolated event in a single market.

On Tuesday, Australia's 10-year government bond yield rose to its highest level since 2011, after Australia released stronger-than-expected inflation data, prompting traders to increase bets on a fourth rate hike by the Reserve Bank of Australia this year, with the probability rising to 54%.

Prashant Newnaha, senior rates strategist for Asia Pacific at TD Securities, said:

"The bond market is not collapsing, but it is issuing a very clear memo: the stickier inflation is, the higher and longer policy rates need to be. Fiscal deterioration and higher term premiums will continue to be the focus of the market."

Judging from seasonal patterns, the pressure may continue. According to Bloomberg data, over the past ten years, September and October are the two worst-performing months for the global bond index, with average monthly declines of more than 1%.

Stock Market Under Pressure, Borrowing Costs Rise Across the Board

The continuous rise in yields is transmitting to the real economy and financial markets through multiple channels.

For the stock market, Robert Pavlik, senior portfolio manager at Dakota Wealth Management, said:

A 4.75% yield on the 10-year U.S. Treasury note is a threshold that makes investors "truly start to be on alert", and the market is beginning to worry that the yield will hit 5% and trigger a stock market correction.

Chris Galipeau, chief market strategist at Franklin Templeton Institute, said that the stock market can currently withstand the current interest rate level, but if the 10-year yield breaks through 5%, the stock market "may run into some trouble".

For ordinary households, the 10-year Treasury yield is the pricing benchmark for 30-year mortgage rates, and the rise in yields directly pushes up home purchase costs.

Drew Matus, chief market strategist at MetLife Investment Management, pointed out that yields breaking through the "comfort zone" of 3.5% to 4.5% will force households to increase savings, putting downward pressure on consumption.

The 30-year U.S. Treasury yield is currently at 5.27%, and it has closed above 5% for 55 trading days since January this year, the most since 2006. In mid-August, the 30-year yield once touched 5.34%, the highest level since 2007.

Garrett Melson, portfolio strategist at Natixis Investment Managers, warned that further rises in yields will exacerbate multiple headwinds facing the stock market, especially against the backdrop of recent weakening hard economic data. He said:

"Attractive real yields coupled with a hint of slowing growth are enough to change the market narrative and reignite buying demand for bonds."

The August non-farm payrolls report to be released this Friday will be the next key observation window.

This article does not constitute personal investment advice and does not represent the position of the platform. The market is risky, investment requires caution, please make independent judgments and decisions.

This article is from the WeChat Official Account "Wall Street CN", author: Dong Jing, authorized for release by 36Kr.