Bond Rout Tests Markets’ Faith in Governments

Bond Rout Tests Markets’ Faith in Governments
Investors see a dangerous convergence: inflation and conflict are lifting the cost of money, while governments’ debt burdens leave markets questioning whether policymakers can absorb another shock.

The sell-off gathered pace on Wednesday after a volatile week in which renewed inflation worries and higher oil prices, linked to fresh Middle East conflict, unsettled sovereign debt markets. Bond prices fell as yields rose, extending pressure already building over the fiscal outlook in major economies.

Germany’s 10-year bund yield rose four basis points to 3.378%, its highest since 2011. Japan’s 10-year yield stood at 3.016% after crossing 3% for the first time in three decades a day earlier. In the UK, 10-year gilt yields hit a fresh post-2008 high of 5.25%, while the US 10-year Treasury yield touched its highest level since November 2023 before both eased slightly.

The immediate market calculation is straightforward: central banks are expected to tighten policy just as energy-driven inflation risks return. The Federal Reserve’s Kevin Warsh struck a hawkish tone at Jackson Hole, the Bank of Japan is seen considering a rise to support the yen, and markets were fully pricing a European Central Bank increase after new EU inflation data.

But 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,” adding that rising borrowing and risk costs were visible in yields worldwide. He warned that debt levels were “at stratospheric levels and increasing,” with little apparent political willingness to address them.

The unease has spread beyond bonds: US equities fell for three straight sessions, with European and Asian markets also retreating. The tension is that this is happening amid healthy global growth—precisely why Maris argues the system looks more precarious if a genuine disturbance arrives.

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