On September 3rd, 2023, global long-dated bonds experienced a notable decline, leading to record-high government borrowing costs in Japan. This trend has raised serious concerns over government debt sustainability and long-term inflation, which have unsettled investors across Europe.
During the trading session, spot gold surged to an all-time high of $3,546.99 as investors rushed to seek alternative safe-haven assets amidst the sell-off in long-term government debt, which has historically been viewed as a low-risk investment.
The yield on the 30-year Japanese government bond (JGB) reached an unprecedented 3.255% on Wednesday morning. This increase follows a rise in similar long-dated bonds such as UK gilts and U.S. Treasuries observed the previous day. Dario Messi, head of fixed income research at Julius Baer, noted that multiple factors are contributing to this situation, including ongoing uncertainty regarding inflation and fiscal concerns due to elevated debt levels in several major economies.
In the Asian trading session, the 30-year U.S. Treasury yield briefly surpassed 5%, last recorded at 4.987%. This spike in yields has prompted investors to monitor potential spillover effects into other asset classes. Josh Chastant, portfolio manager at GuideStone Funds, remarked that the 5% yield threshold could significantly impact equities, indicating that we might be approaching more attractive levels for bonds.
As European bond markets commenced trading, Germany's 30-year yield remained steady at 3.413%, close to a 14-year high. Meanwhile, British 30-year gilt yields increased by 6 basis points, hitting a post-1998 high of 5.752% before stabilizing. The surge in these long-dated instruments is largely driven by investor anxiety regarding the scale of state borrowing and diminishing demand for long-term bonds from global investors.
The gap between two-year and 30-year U.S. government bond yields has widened to approximately 133 basis points, the highest level since December 2021, while a similar measure in the UK has reached its peak since 2017. Analysts suggest that this global trend may continue to amplify, particularly as higher yields in Japan lead Japanese savers to reconsider their overseas asset investments.
This situation poses a "perfect storm" for long-dated bonds and presents significant challenges for governments. British Finance Minister Rachel Reeves is anticipated to propose tax increases in her autumn budget to align with fiscal targets, while in France, Prime Minister Francois Bayrou faces a potential loss in a confidence vote as opposition parties resist his proposed spending cuts.
In response to these developments, the British pound fell to a four-week low against the dollar, trading at $1.3334, while the Japanese yen softened to 148.60 per dollar, following a 0.8% decline in the previous session. Additionally, senior aides to Prime Minister Shigeru Ishiba, including Secretary-General Hiroshi Moriyama, offered to resign from key leadership roles after the party's defeat in the July 20 upper house elections.
Attention is now shifting towards upcoming services data in Europe, which may provide insights into how countries are navigating the unpredictable tariff policies implemented by U.S. President Donald Trump. Following a recent ruling that found some tariffs illegal, Trump announced plans to seek an expedited Supreme Court ruling, with existing tariffs remaining in place until October 14.
Recent data revealed that U.S. manufacturing contracted for the sixth consecutive month in August, primarily due to the adverse effects of import tariffs. This downturn has contributed to a decrease in Brent crude oil prices, which fell by 0.5% to $68.80 a barrel on Wednesday morning. Upcoming data on U.S. nonfarm payrolls, job openings, and private payrolls will further inform the labor market's status, which has become a focal point in discussions surrounding Federal Reserve policy. Markets currently anticipate a 25-basis-point interest rate cut by the Fed later this month, with an 89% probability assigned to this outcome.
Reporting by Naomi Rovnick in London and Rocky Swift in Tokyo, with additional contributions from Ankur Banerjee, Rae Wee in Singapore, and Dhara Ranasinghe in London. Edited by Tomasz Janowski.
