Yields in bond markets are rising to levels not seen in decades. The sell-off is spreading from the US to other countries and is starting to become self-reinforcing. This also has consequences for Germany.
Yields on the bond markets are rising to long-term highs. Bond legend Bill Gross doesn't expect the situation to calm down any time soon. His advice is correspondingly drastic: "Don't buy bonds," he writes in the "Financial Times." The logic behind it: If new bonds offer higher interest rates, securities that have already been issued with lower interest rates become less attractive - their prices fall. The longer the term, the more impact such interest rate changes can have on the price. Gross only makes an exception for one-year US government securities.
The trigger is a violent sell-off in US government bonds; September was the worst month for them in four years. The yield on landmark 10-year US Treasuries rose to 5.3 percent, the highest level since 2002. Rising yields are the downside of falling bond prices. The $32 trillion U.S. Treasury market is the anchor of the global financial system.
The turmoil in the US market has dampened demand for government bonds worldwide. For months now, the markets have been under the impression of growing inflation concerns, triggered primarily by the energy price shock caused by the Iran war.
There are also concerns that the US economy could overheat. In the second quarter, it grew by an annualized 2.2 percent, which was even stronger than initially expected. High energy prices and the strong US economy are fueling expectations that key interest rates will continue to rise and thus depressing the prices of existing bonds. The Fed only raised its key interest rate again in September for the first time since 2023.
High debt
Another reason for the rising yields is the growing debt in some industrialized countries, especially the USA. The mountain of debt there recently exceeded the $40 trillion mark. High interest rates are a huge problem for governments as they make it much more expensive to take on new debt. Even Germany, with its federal bonds that set the trend on the financial markets, is not spared from the sell-off. The yield on ten-year federal bonds, on which building interest rates are based, rose to 3.6 percent.
In Japan, the yield on ten-year government bonds is close to a 30-year high at 3.1 percent. In addition to the turbulence in the USA, the prospect of further interest rate hikes by the Bank of Japan and concerns about government finances are driving returns there. In Australia, ten-year bonds are at 5.4 percent, close to their highest level since 2011. France is also coming under pressure: the yield on ten-year government bonds there rose to 4.8 percent.
The US government has recently tried to push down the yield on US government bonds in order to make debt service cheaper. With the announcement that it wanted to buy more of its own bonds in the future, the US Treasury Department was only able to temporarily lower yields slightly.
Bond legend Gross bases his skepticism primarily on the high level of debt. According to him, government debt, mortgages and corporate loans now total around $84 trillion in the USA. He is particularly critical of government finances: net debt in the USA is around 100 percent of economic output. Added to this is the enormous capital requirement for the expansion of artificial intelligence. Hundreds of billions of dollars for new data centers are already being financed through the bond market. Gross fears that this development could keep inflation and interest rates high for longer.
The sell-off is self-reinforcing
But now the sell-off is no longer driven solely by such fundamental concerns. There are technical factors in the US bond market that are increasing selling pressure.
The major sellers of long-term US government bonds currently include hedge funds and real estate funds with large holdings of mortgage-backed securities. Rising interest rates mean that homeowners are less likely to pay off their loans early. This extends the term of these mortgage securities. To offset the additional interest rate risk, the funds sell other long-term securities - including US government bonds.
Similar adjustments occur for leveraged funds with large positions in the futures market. If yields continue to rise, they must reduce risks and sell positions. This creates a cycle: sales drive up returns, higher returns trigger more sales. What is particularly problematic is that the buyers who normally return to the market when prices fall sharply are missing.
As long as the economy and energy prices keep inflationary pressure high and at the same time there is a lack of buyers for long-term bonds, the market is unlikely to calm down. This means that the sell-off threatens to continue on its own: rising yields force new sales - and new sales drive the yields even higher.
