On Wednesday, global bond markets experienced increased volatility, with both UK and US government bond yields rising, indicating growing market concerns about the uncertainty of the macroeconomic and policy environment. UK bond yields reached multi-year highs, while the sell-off in the US bond market further pushed yields toward critical levels.
UK Bond Yields Surge, Increasing Fiscal Pressure
The yield on the UK 10-year government bond rose by more than 10 basis points on Wednesday, reaching 4.80%, the highest level since 2008; the 30-year bond yield also hit a record high since 1998. This is particularly unusual as the UK is at the beginning of an interest rate easing cycle.
Despite a significant easing in UK inflation rates, the fiscal policies of the Labour government have raised market concerns. The budget announced by Chancellor Rachel Reeves last October left only £9.9 billion in fiscal space, a figure recently reduced to £1.1 billion.
Market analysts suggest that the continued rise in bond yields might force the government to make difficult choices, such as further tax hikes or cuts in public spending. The UK's Office for Budget Responsibility plans to release new forecasts on March 26, which will further assess the fiscal situation based on the latest changes in government bond yields.
Jefferies' Head of Forex, Brad Bechtel, bluntly stated that the UK might face a "fiscal emergency." Although there is currently no sign of a market crash similar to that during the Truss government in 2022, the current situation is showing signs of a "micro version."
US Bond Market Nears 5% Threshold
Meanwhile, the sell-off in the US bond market continues, with the 10-year US Treasury yield rising from 3.6% to nearly 4.7% since September last year. After this week’s ADP "small non-farm" data and initial jobless claims data were released, market anxiety slightly eased, but long-term US Treasury yields have approached the 5% level, with the 20-year and 30-year yields also nearing this threshold.
Analysts believe this reflects investors' concerns about the new Trump administration's tariffs, tax cuts, and the US government's deficit issues. ING Global Debt and Rates Strategy Head, Padhraic Garvey, predicts that the 10-year US Treasury yield might rise to 5.5% by the end of 2025. He noted that the Federal Reserve might maintain restrictive rates to cope with pricing pressure while alleviating investors' concerns about the fiscal deficit.
Increased Risk of Loss for Bond Investors
As yields rise, bond investors, especially long-term bond holders, face increased risk of losses. For example, the TLT fund (iShares 20+ Year Treasury Bond ETF) on the US stock market has a duration of 15.9 years, and if long-term US Treasury yields rise by another 100 basis points, investors may face a nearly 16% drawdown risk.
At the same time, traders in the interest rate market have also reduced their expectations for Federal Reserve rate cuts. The market expects the total rate cut this year to be only 36 basis points, with the first cut likely to occur in July.
Increased Uncertainty in Market Outlook
Whether in the UK or the US, the rapid rise in government bond yields is testing the market's resilience. The uncertainty in UK fiscal policies and concerns among US investors about policies may continue to drive bond market volatility in the coming period. Investors need to closely monitor central banks' policy moves and changes in the global economic landscape.
