Bond Rout Exposes Governments’ Shrinking Room to Maneuver

Bond Rout Exposes Governments’ Shrinking Room to Maneuver
The bond-market sell-off is being read as more than a technical retreat: investors see inflation and geopolitical risk colliding with debt loads that governments have shown little appetite to confront.

The rout accelerated into Wednesday after a renewed inflation scare, amplified by Middle East conflict and rising oil prices. Government borrowing costs climbed across major economies: Germany’s 10-year bund yield reached its highest level since 2011, Japan’s 10-year yield moved above 3% for the first time in three decades, and British 10-year gilt yields hit a fresh post-2008 high. The U.S. 10-year Treasury yield also touched its highest point since November 2023 before easing slightly. Because yields rise as bond prices fall, the moves marked a broad retreat from sovereign debt.

The immediate trigger is a changing rates outlook. Markets expect central banks to tighten policy this month, with the European Central Bank’s next increase fully priced in after new EU inflation data. Federal Reserve Chair Kevin Warsh adopted a hawkish tone at Jackson Hole, while the Bank of Japan is seen as weighing a rise to support the weakening yen.

Yet investors’ deeper concern is fiscal. George Maris, chief investment officer and global head of equities at Principal Asset Management, said “the fundamental tenets [in markets] are a little shakier than they’ve been,” as the cost of money and risk rises globally. He warned that debt levels are “at stratospheric levels and increasing,” adding: “I don’t see the political willingness to tackle this anywhere.”

The timing sharpens the alarm. Equities have turned risk-off after a strong, AI-fuelled run, but global growth remains healthy. For Maris, that makes the rise in debt more troubling: economies are entering the next potential disturbance with less fiscal room than they should have.

Continue reading https://foxvector.com/stories/01a06369-972b-2008-73ba-32eed237778b