Freedom cites two reasons for the global government bond sell-off

The sell-off in U.S. government bonds has spread to markets in Asia and Europe ahead of the Federal Reserve’s interest-rate decision. The yield on 10-year U.S. Treasuries rose above 5% to its highest level since 2007, while the comparable figure in Japan topped 3% for the first time in 30 years.

Freedom’s lead analyst Natalia Milchakova links the decline in bond prices to uncertainty around the Fed’s decision and a sharp rise in oil prices. Further moves in the debt market will depend on the U.S. regulator’s actions on September 16 and its assessment of inflation risks.

Why bond prices fall when yields rise

Government bonds are debt securities through which countries raise money from investors. The buyer of such a security provides funds to the state and receives interest income.

The price of an already issued bond and its yield move in opposite directions. When investors sell securities and their value declines, the potential yield for a new buyer rises. A broad-based increase in yields therefore points to weakening demand for government debt.

U.S. Treasuries are considered one of the key benchmarks for the global financial market. Changes in their yields affect borrowing costs, stock valuations, and the attractiveness of other countries’ debt securities.

Japanese bond yields hit a 30-year high

The yield on 10-year Japanese government bonds rose to 3.025% on September 15. The indicator also increased in South Korea, Singapore, the U.K., and Germany.

Investors expect the Bank of Japan to raise its policy rate by 0.25 percentage points on September 18, to 1.25%. This could be the highest rate level in 31 years. The tightening of monetary policy is aimed at curbing inflation and supporting the yen.

In the European market, additional pressure comes from expensive energy. Earlier, Freedom noted rising yields on German government bonds amid accelerating inflation and higher oil and gas prices.

The market awaits the Fed decision on September 16

According to Natalia Milchakova, investors fear that the Fed may refrain from the expected rate hike. Keeping the rate unchanged or cutting it under political pressure could undermine confidence in the regulator’s willingness to bring inflation back to its 2% target.

Market participants put the probability of a 0.25 percentage-point hike at 92%. A month earlier, the figure was 59.4%. If the Fed raises rates, it would be the first time since July 2023.

A rate hike could signal that the regulator intends to continue fighting inflation and partially restrain the rise in bond yields. A more dovish decision, by contrast, could intensify selling in government securities.

Expensive oil amplifies inflation risks

Milchakova cites the surge in oil prices as the second factor behind the sell-off. If oil prices hold above $100 per barrel, fuel and transportation costs for importing countries will continue to rise.

The most vulnerable may be economies that are heavily dependent on energy imports, including Japan and a number of European countries. Rising inflation alongside a slowing economy increases the risk of stagflation — a condition in which weak economic growth coincides with rapidly rising prices.

Geopolitical tensions are already affecting oil prices and investors’ risk appetite. In a UAE market review, Freedom drew attention to the impact of the situation in the Middle East and the security of shipping through the Strait of Hormuz on financial markets.

After the Fed announces its decision, the situation in the debt market may change. The direction of moves will depend not only on the rate level but also on the regulator’s signals regarding future monetary policy.

Not an individual investment recommendation.