■Marion Le Morhedec
The global bond market has experienced a difficult period recently. The U.S. 10-year Treasury bond yield once climbed to more than 4.8%, setting a new high since 2023, and the 30-year Treasury bond yield is also approaching 5.3%. This wave of selling pressure is not limited to the United States. UK, German and Japanese government bond yields are also rising, indicating that this is a global bond market correction.
The global bond market has recently launched a wave of selling. The 10-year Treasury bond yield in the United States has exceeded 4.8%, and the yields in the United Kingdom, Germany, Japan and other countries have risen simultaneously, indicating that the market consensus on long-term high interest rates has spread around the world. (Bloomberg)
However, what is more noteworthy is not the rise in yields themselves, but that the reasons driving yields higher are changing.
In August this year, the bond market still fluctuated mainly around monetary policy expectations. Investors continue to evaluate the U.S. Federal Reserve's determination to fight inflation and whether to further raise interest rates. The market is focusing on the repricing of short-term interest rates and policy paths.
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However, recent market developments have shown that long-term government bond yields have also begun to rise significantly, indicating that the market focus has turned to term premium, which is the additional return required to hold long-term bonds.
There are multiple factors behind the current market re-evaluation of term premium. First, rising oil prices have once again triggered market concerns about inflation; second, major economies continue to face huge fiscal deficits and need to raise funds through bond issuance; in addition, corporate financing needs remain strong, increasing the scale of bond supply that the market must absorb.
Taking the United States as an example, the issuance of investment-grade corporate bonds in August hit a record high for the same period in history. When the government and companies expand financing at the same time, the question that the market must consider is no longer just how many times the Federal Reserve will raise interest rates, but how high the yield rate is needed to attract enough funds to undertake the continuously increasing supply of long-term bonds.
If the yields required by investors continue to increase, it means that the compensation required by the market does not only come from future policy interest rate expectations, but also takes into account inflation uncertainty, fiscal risks and supply pressures, making changes in term premium worthy of great attention.
Unlike policy interest rate expectations, once the term premium rises structurally, it is often likely to last longer. When economic growth slows, market expectations for central bank policies may quickly reverse; but if investors believe that inflation will fluctuate more frequently and government borrowing needs will remain high for a long time, long-term yields may not easily return to the levels of the past ultra-low interest rate era.
Be wary of the widening of credit spreads, corporate financing faces the risk of "double pressure"
In addition to the government bond market, the performance of credit markets is also worth tracking closely.
At present, the credit market has not reflected a significant deterioration in corporate debt repayment capabilities, nor has it shown a significant increase in default risks. In other words, the market's main concerns lie in government debt, supply and maturity risks, rather than corporate fundamentals.
However, if government bond yields continue to rise in the future and credit spreads begin to widen significantly, companies will face dual pressures. On the one hand, basic financing costs will increase; on the other hand, investors will also demand higher credit risk compensation. This will become an important indicator of whether financial conditions will tighten further.
While the short-term environment remains challenging, the long-term investment value of fixed income assets is actually improving.
In the ultra-low interest rate environment over the past many years, bond investors have faced the problem of insufficient returns. However, as the yield rate rebounds, it means that the potential profitability in the future will increase simultaneously. From an asset allocation perspective, fixed income assets have once again emerged as a more attractive source of income.
Therefore, the current focus of discussion in the global bond market has gradually surpassed the next central bank interest rate decision. More importantly, in the context of increasing inflationary fluctuations, expanding fiscal deficits, increasing government borrowing, and an increasingly complex bond supply environment, how much return do investors need before they are willing to take long-term risks?
Short-term deposit fluctuations in the bond market provide a rare opportunity to lock in long-term profits
In the short term, the bond market may continue to fluctuate. Investors should remain cautious about credit risks and should not make premature conclusions about whether long-term yields have peaked. However, while rising yields have made short-term allocation of fixed-income assets more challenging, they are also strengthening their long-term investment appeal and creating fixed-income investment opportunities that have been rare in recent years for investors.
(The author is Fidelity International’s Global Fixed Income Investment Chief)
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