Global Bond Markets Put Governments on Notice Over Fiscal and Inflation Risks
Japan and Europe face growing pressure
Japan is experiencing a particularly significant shift in its bond market. Its 10-year borrowing costs have climbed to nearly 3%, while 30-year yields have moved above 4%.
Investors are increasingly expecting the Bank of Japan to raise interest rates as early as September as inflation concerns grow.
Higher Japanese bond yields could also affect U.S. markets because Japanese investors have traditionally been major buyers of U.S. government debt. More attractive returns at home could encourage them to reduce purchases of Treasuries.
Foreign holdings of U.S. Treasuries declined in June, according to U.S. Treasury Department data, with Japan, Britain and China among the countries reducing their holdings.
European governments are facing similar pressures. Germany’s 10-year bond yield reached its highest level since 2011, while French yields rose to their highest since 2008. Britain’s 30-year borrowing costs approached levels last seen in May, which were the highest since 1998.
High government spending and debt in countries such as France and Britain have contributed to investor concerns. Climate-related events are also expected to increase pressure on government budgets.
The bond market selloff is significant because government bond yields serve as a benchmark for borrowing across the economy. Higher sovereign yields can translate into more expensive corporate loans, consumer credit and household mortgages.
Some investors, however, believe the recent rise in yields could make government bonds increasingly attractive and eventually encourage buyers to return to the market.
The broader concern for policymakers is whether higher yields represent a temporary adjustment or the beginning of a longer period in which investors demand substantially greater compensation for lending to governments.
With inflation still vulnerable to higher energy prices, government debt continuing to rise and geopolitical risks increasing, bond markets are placing greater pressure on policymakers to demonstrate control over both fiscal policy and inflation.
(Source: Reuters)
