The sell-off sweeping global bond markets appears painful, but it is still far from the sharp losses seen in the markets four years ago, when soaring inflation forced central banks to implement a rapid and successive series of interest rate hikes.
The key difference lies in the magnitude of the move. While the recent sell-off has pushed bond yields to multi-year highs in the world's largest markets, the current rally represents only a fraction of the move seen in late 2022.
Data compiled by Bloomberg showed that global government bond yields rose by 17 basis points cumulatively over a 20-day moving average, compared to a 62-basis-point increase over the same period last year. On a peak-to-trough basis, bonds are down 4.2% year-to-date, a far cry from the 23% decline they experienced in 2022.
The current sell-off is less severe than the 2022 shock.
Although the current sell-off shows no clear signs of abating, the relatively limited rise in yields so far provides some reassurance to seasoned investors who have experienced previous bond market turmoil.
Stephen Miller, a consultant at Sydney-based investment management firm GSFM who has been following debt markets since 1983, said investors may need to take a more measured approach to current developments. He added that he couldn't say the bonds represented an exceptional buying opportunity, but noted that current yield levels warranted some attention from income-seeking investors.
The bond sell-off in 2022 pushed the global bond market into its first bear market in a generation, after central banks, led by the US Federal Reserve, embarked on the most coordinated and rapid monetary policy tightening cycle in nearly half a century.
This came in the face of a strong wave of inflation fueled by a recovery in demand after the coronavirus pandemic, and exacerbated by the war in Ukraine, prompting central banks to raise interest rates at an accelerated pace to control rising prices.
Inflation is not the only factor behind bond pressures
Inflation remains a major factor in the current sell-off, especially given the war with Iran and its impact on energy prices, but other factors are adding further pressure on global bond markets.
High levels of government spending in major markets such as Japan, the United Kingdom and the United States are keeping debt issuance at high levels, prompting investors to demand additional returns for holding longer-term bonds.
At the same time, the huge amounts of money required to finance the AI boom are increasing competition for capital, which in turn is helping to push borrowing costs to higher levels.
However, bond losses have remained more contained, partly because yields are rising from much higher levels this time around, providing investors with a larger income cushion to help offset the price decline. In contrast, yields were near historically low levels before the start of 2022.
Higher returns provide greater protection for investors.
The average coupon rate carried by bonds listed in the Bloomberg Global Treasury Total Yield Index was around 2.68% this year, compared with 1.84% in 2022.
Kerry Craig, global markets strategist at JPMorgan Asset Management in Melbourne, said the situation for many economies is not as bad as the bond market performance might suggest.
He added that investors in some markets, such as Australia, may be overestimating the size of the interest rate hikes that the central bank will make.
Some recent economic data supports this view. In the United States, some key figures have been disappointing, with jobs declining in July and retail sales falling unexpectedly. The Japanese economy also grew at a slower pace than anticipated in the second quarter.
US and Japanese Treasury yields bring concerns back to the forefront
However, no one can yet say for certain that bond yields have peaked, as there is still room for further losses in the debt markets.
The bond sell-off could continue as inflation driven by higher energy prices remains a factor supporting bets on higher interest rates, while massive government issuances add further upward pressure on yields.
The increase in Japanese yields also represents an additional source of pressure, as it may prompt global capital to return to Japan instead of investing in foreign markets.
The yield on the benchmark 10-year U.S. Treasury note, a global benchmark for borrowing costs, rose to 4.81% on Wednesday, its highest level since late 2023, putting further pressure on debt markets in other advanced economies.
In Japan, the yield on 10-year government bonds touched the 3% level on Tuesday for the first time this century.
Less volatility despite the continued sell-off
However, the low levels of market volatility suggest that investors are handling the current sell-off with greater composure than previous turmoil.
Global government bond yield volatility fell to 37 basis points, compared to a peak of 56 basis points in May. This measure had surged during 2022 before reaching a high of nearly 92 basis points in March of the following year.
Ayako Sera, chief market strategist at Sumitomo Mitsui Trust Bank in Tokyo, said that negative factors weighing on bonds are steadily accumulating, but so far no decisive catalyst has emerged with enough force to drive investors out of the market.
Thus, despite yields rising to worrying levels in a number of major economies, the current picture is fundamentally different from the shock of 2022; the rise in yields comes from a higher base, and the returns investors are receiving provide greater protection, while markets are still waiting to see whether inflation, energy prices, and government spending will push the current sell-off to a more severe stage.
