Introduction: Bond Market Slide Deepens
Good morning, and welcome to our rolling coverage of business, the financial markets, and the world economy.
Trouble is brewing in the bond markets as investors grow increasingly concerned about inflation and signs that the US economy may be running too hot.
Government borrowing costs jumped yesterday and are continuing to rise in Asia-Pacific markets, pulling down share prices.
The catalyst for these shifts was a surprisingly strong survey of US businesses indicating that activity surged at the fastest pace in five years, amid rising costs. This prompted a sell-off in US government bonds, as traders speculated this might lead to further increases in US interest rates to cool inflation.
Chris Weston, head of research at brokerage Pepperstone, commented:
“With unemployment at 4.1% and growth running above trend, the US economy is showing signs of modest overheating. The Federal Reserve will therefore be firmly on notice. If the next inflation readings continue to print hot, policymakers may conclude that aggregate demand needs to be brought lower through the blunt tool of higher interest rates.”
Investors were also alarmed by a subpar auction of US five-year bonds that attracted low demand—potentially indicating waning appetite for Treasury bonds.
As a result, bond prices have slid, pushing the yield on five-year US Treasuries above 5% for the first time since 2007. Meanwhile, 10-year US Treasury yields surged over 5%, marking their biggest one-day increase since the Trump administration’s ‘Liberation Day’ tariff announcement nearly 18 months ago.
These developments are unsettling the global bond market, given that US debt serves as the ‘risk-free’ benchmark asset for financial markets worldwide. Yields on Japan’s benchmark bonds have also hit their highest level in decades today.
Ipek Ozkardeskaya, senior analyst at Swissquote, offered further insight:
“In the US, flash PMI figures for September showed activity expanding at the fastest pace in over five years. New orders grew at their fastest pace since April 2022, and manufacturing hiring was the strongest since February 2021. Massive AI investment and resilient consumer spending outweighed energy-price-led worries. In other words, economic activity expanded strongly while price pressures remained elevated. That’s the perfect combination for fuelling further rate-hike expectations.”
The Agenda
- 11am BST: CBI distributive trades survey of UK retailers
- 8.30am BST: Swiss National Bank’s interest rate decision
- 1.30pm BST: US jobless claims data
- 3pm BST: Bank of England’s Clare Lombardelli speech on “Macroeconomic Policy in a Heterogeneous and Imperfectly Rational World”
Key Insights from Today’s Updates
- The UK’s 10-year gilt yield rose 1.8% to its highest since the 2007 financial crisis.
- Rising gilt yields impact debt servicing costs for the UK government.
- Analysts predict smaller fiscal buffers may be accepted instead of tax hikes.
Feel free to reach out for more detailed analysis on any specific topics!
