Global bond markets are witnessing a significant shift, with government bond yields soaring to levels not seen in over a decade across major economies. This week, Australia’s 10-year government bond yield jumped to 5.18 per cent, its highest since 2011, mirroring sharp increases in Japan, the UK, France, Germany, and the United States. This broad-based rise pushes Bloomberg’s global government bond yield gauge to its highest point since mid-2008, driven by escalating inflation concerns and renewed geopolitical tensions. A month-long pause in US attacks on Iran pushed Brent crude above US$95 a barrel, further fuelling fears of energy inflation which, in the Eurozone, surged to 14.3 per cent in August.
Adding to market anxieties, US Federal Reserve Chairman Kevin Warsh recently signaled a tough stance on inflation, leading money markets to price in a strong possibility of a US interest rate hike as early as this month. US Treasury Secretary Scott Bessent is grappling with this challenging environment, having seen his attempt to buy back long-dated US government bonds fail to stem rising yields. Bessent is also acutely focused on Japan, urging the Bank of Japan to raise rates. The fear is that if Japanese bond yields become sufficiently attractive, their major investors, significant buyers of US bonds and stocks, could repatriate capital, potentially creating further selling pressure on US assets.
Despite the bond market turmoil, global equity markets, particularly in the US, have shown resilience, remaining near record highs. This is largely attributed to an extraordinary artificial intelligence-led earnings bonanza, with S&P 500 earnings per share for the June quarter rising by a staggering 53 per cent. However, market strategists like Matt King of Satori Insights warn that this AI boom is being financed by massive debt issuance from technology companies, driving up borrowing costs for everyone, including homeowners and governments. This dynamic, coupled with persistent inflationary pressures, reinforces the expectation of a “higher-for-longer” world for borrowing costs, with uncertainty about what might eventually “break” under the mounting financial strain.
