Bond-market instability: US 10-year yield at 4.8% and global knock-on effects

The past fortnight has seen volatility sweep government bond markets in major economies, with the US 10-year Treasury yield reaching 4.8% on Friday, up from 4.64% ten days earlier; the 30-year yield touched its highest level since 2008 midweek. Capital Economics points to a market reassessment of US public finances: total US government debt has passed $40tn and annual deficits are forecast at about 6% of GDP for the foreseeable future.

Analysts say the traditional safe-haven status of US Treasuries no longer guarantees immunity. Neil Shearing of Capital Economics said markets are starting a more realistic reassessment of fiscal pressure in the US and observed “there’s no plan.” Russell Jones of Llewellyn Consulting noted markets often delay judgment and it is hard to time when they decide that is enough.

Renewed hostilities between the US and Iran have pushed oil above $90 a barrel, increasing expectations that central banks will raise interest rates. Markets read a speech by new Fed chair Kevin Warsh as signalling a willingness to act; the ECB is expected to lead with a rate rise next week, and markets are pricing higher borrowing costs across major economies.

A dramatic expansion of borrowing by US AI hyperscalers has provided an alternative home for cash: Vanguard estimates debt issued by five major tech companies at $135bn this year versus an average of $35bn between 2020 and 2024. That raises questions about the market’s capacity to absorb so much debt at once.

The rise in yields is already having local impacts. In the UK investors are pencilling in three quarter-point rate rises over the next 12 months; higher gilt yields feed through into predictions of greater interest costs for the Treasury ahead of Chancellor John Healey’s autumn budget. David Aikman of the National Institute of Economic and Social Research urged the government to use spending cuts or tax increases to reduce vulnerability from high debt.

In Australia yields have breached 15-year highs just after government debt surpassed A$1tn, at a time when the Labour government faces pressure to rein in high spending and amid falling house prices. Treasurer Jim Chalmers highlights Australia’s relatively strong budget position — debt around half the size of the economy and deficits under 1% of GDP.

Some economists, including Bank of England policymaker Swati Dhingra, argue that more frequent inflationary shocks from extreme weather and the climate emergency could lead to structurally higher interest rates.