Sell-off on the bond markets: US yields break the five percent mark

Government bond prices continue to fall worldwide. Recently, the sell-off has accelerated significantly. In return, the yield on ten-year US bonds climbed to 5.025 percent today. This is the highest level since the financial crisis of 2007. Since the start of the Iran war, the yield has already risen by more than one percentage point.

There is also a mood of crisis on the German bond market. The yield on ten-year federal bonds reached a multi-year high of 3.57 percent. At the end of February this was still 2.6 percent.

Since government bonds offer a fixed interest rate, falling bond prices result in a higher return on the securities for buyers.

Concerns about inflation and interest rates have solidified

Behind the sell-off on the bond market are the recently increased concerns about inflation as a result of the Iran war. As oil prices rise, consumer prices are rising, and economists now expect higher and longer-lasting inflation as well as rising key interest rates from central banks. While the European Central Bank raised its key interest rate last week to curb inflation, markets are expecting the US Federal Reserve to raise interest rates tomorrow.

Inevitably, along with inflation expectations, interest rates at the “long end”, i.e. on the bond market, also rise. If inflation is around three percent, as it is currently, bond buyers expect higher returns to compensate for their loss of purchasing power.

Another reason for the sharp rise in yields are concerns about growing debt in some industrialized countries, especially in the USA. The mountain of debt there recently exceeded the $40 trillion mark. The creditors, i.e. the bond buyers, also want to be compensated with higher returns for the increasing risk of default.

This means that the expectation of permanently higher interest rates has solidified on the financial markets.

Building interest rates are rising significantly

The changed interest rate landscape has far-reaching consequences. The rising yields are a significant problem for the finance ministers, as they make it much more expensive to take on new debt.

And while bond buyers and savers can expect higher returns - before deducting inflation, of course - the higher returns have a direct impact on property buyers and builders. The building interest rates are based on ten-year federal bonds.

According to the analysis firm Barkow Consulting, the interest rates for building financing with a ten-year fixed interest rate have recently reached around 4.25 percent - and the trend continues to rise. “We are slowly approaching the possible 4.5 percent for building interest rates,” says Max Herbst, founder of the Frankfurt-based FMH financial consultancy.

DAX almost makes up for losses

Given the developments on the bond market, the stock market is still quite stable. After losses of up to one percent, the DAX recovered by early afternoon and almost reached the previous day's level.