Global bond market sell-off "replaces central bank rate hikes": yields surge above 4% to highest since 2000, rate hike expectations in eight major economies plunge nearly 200 basis points

According to Zhitong Caijing APP, the global bond market is independently driving up financing costs, partially taking over the tightening task from central banks, which may reduce the number of benchmark rate hikes required to curb inflation.

After weeks of sell-offs, bond yields have soared to multi-year highs. Even if policymakers take no further action, financial conditions have already tightened significantly. Compilation data shows that traders have subsequently lowered their rate hike expectations; since mid-September, the cumulative rate hikes priced in by interest rate swap contracts in the eight major economies have fallen by nearly 200 basis points.

Currently, there are almost no signs that the bond sell-off is subsiding. From the United States and Japan to France, market concerns over fiscal expenditures in various countries have prompted investors to demand higher risk premiums; meanwhile, a large number of artificial intelligence (AI)-related bond issuances continue to absorb market funds.

The rising borrowing costs are spreading into the mortgage and junk credit fields, which exerts a certain dampening effect on the economy—an outcome that central banks were aiming to achieve by raising policy rates.

“The higher the degree of tightening priced in by the market, the tighter financial conditions become,” said Ken Orchard, Head of International Fixed Income at T. Rowe Price, which manages $1.9 trillion in assets. “And the tighter the financial conditions, the fewer tightening actions central banks may ultimately need—or be able—to implement.”

Compilation data reveals that traders are currently pricing in a total of 539 basis points of rate hikes across the eight major economies, down from 717 basis points in September, when rate hike expectations were at their highest since 2022. The biggest decline occurred in Australia, followed by the eurozone, affected by concerns about France’s fiscal outlook, then Korea and Canada.

The average yield on global government bonds has now risen above 4%, the highest level since 2000, raising questions about where the tipping point lies. While rising yields can shoulder part of the central banks’ anti-inflation work, if the banks appear overly focused on propping up growth, investors may doubt their resolve to combat inflation and subsequently demand a higher premium for holding long-term bonds.

“Central banks ultimately have to balance the mission of growth with the short-term risks of inflation,” said Yuxuan Tang, Head of Asia Rates and Foreign Exchange Strategy at J.P. Morgan Private Bank. “We believe most rates markets are currently overestimating the risks of further hikes, given the rising downside risks to growth from geopolitical tensions.”

For investors, this may once again make bonds appear attractive. Tang noted that high-quality fixed income is worth buying because it remains one of the best hedges against inflation and slowing growth, adding that the sharp rise in yields over the past month has significantly improved risk-reward profiles.

Deutsche Bank currently sees opportunity in U.S. Treasuries. “Our view is that, at least from an energy perspective, the current situation will not last forever,” said Christian Nolting, Chief Investment Officer for Global Private Banking in Frankfurt, “The energy scenario will improve and inflation will fall. From this perspective, I don’t think we’re in a full rate hike cycle.”

Barclays strategists stated that the market has already shared part of the tightening burden for the Federal Reserve. “This round of tightening has occurred partly independently of the Fed’s additional rate hike expectations,” they wrote. “All else equal, this should reduce the urgency for further Fed hikes, even though the risk-management framework still skews policy towards further tightening.”

But not everyone agrees with this assessment. Some believe the market still underestimates the risk of further rate hikes, as geopolitical tensions have extended inflation pressures by boosting oil prices. Oil prices remain above $100 per barrel, while traders are weighing escalating Iranian attacks on tankers in the Strait of Hormuz against former U.S. President Trump’s remarks that the U.S. “will not attack” Tehran before the November midterm elections.

Macro strategist Michael Ball said, “Actual economic activity has absorbed recurring uncertainty and tighter financial conditions better than expected, reinforcing the view that the equilibrium policy rate is higher than previously thought.”

Kenneth Goh, Director of Private Wealth Management at UOB Kay Hian in Singapore, stated that even if the slowing growth becomes increasingly hard to ignore and central banks opt to pause rate hikes, fiscal concerns may still limit the scope for long-term yields to fall.

U.S. Treasury Secretary Scott Bessent has tried to reassure skeptical investors, saying that stronger growth and spending constraints will “very quickly” improve the trajectory of U.S. debt. In Japan, Prime Minister Sanae Takaichi stated her government is prepared to review spending and revenue plans if bond yields experience abnormal volatility.

Since the second half of the year, the yield on the U.S. 10-year Treasury note has jumped more than 70 basis points, Japan’s yield for the same tenor rose 31 basis points, while Germany and France climbed 61 and 121 basis points, respectively.

Currently, policymakers are signaling readiness to act. Last month, Federal Reserve officials voted unanimously to hike rates—the first time since July 2023—though some advocated maintaining policy flexibility, suggesting no further action may be taken this month. The Reserve Bank of India has shifted to a hawkish stance, resuming rate hikes after nearly four years and hinting at further tightening.

This backdrop will loom over the annual meeting of the International Monetary Fund starting Monday in Bangkok, where global policymakers will focus on growth, inflation, rates, and government debt. On Wednesday, the U.S. will release September CPI data, with markets closely watching for clues on the Federal Reserve’s rate path.