Global sovereign bond markets remained on shaky ground on Wednesday, with benchmark yields staying near multi-year highs, as fixed-income bureaus braced for the end of a painful month marked by aggressive repricing of interest rate hikes across major economies.
The yield on the benchmark 10-year US Treasury note held steady near its highest level since July 2007 at 5.23%. The benchmark 10-year yield was on track to rise by nearly 50 basis points in September, which would have been the largest monthly increase in almost two years, amid continued debt issuance and persistent energy price inflation that weighed on long-term securities.
Short-term returns drive a sharp monthly sell-off.
Selling pressures were particularly acute at the short end of the monetary policy-sensitive global debt curves, where traders rushed to price in higher final rates from major central banks.
The yield on two-year US Treasury notes, which touched its highest level since 2024 in the previous session near 4.96%, posted a monthly gain of more than 50 basis points, reflecting rising bets that the Federal Reserve will carry out another interest rate hike in October.
European debt centers saw similar destruction over the time period, with benchmark German and French yields rising to their highest levels in 17 and 18 years respectively, before stabilizing at the start of trading on Wednesday.
In Asia, yields on Japan’s 10-year government bonds held steady, capping a dramatic quarter that saw benchmark borrowing costs rise by more than 40 basis points, as markets continued to test the Bank of Japan’s yield curve parameters.
The PCE index and central bank statements are in the spotlight.
The global debt sell-off continues to be fueled by persistent energy cost pressures – with crude oil prices remaining high – and a barrage of hawkish statements from central banks warning that official interest rates must remain elevated for longer.
Trading desks are holding high cash reserves in anticipation of key macroeconomic data due later in the session, most notably the US Personal Consumption Expenditures (PCE) Index for August, the Federal Reserve's preferred inflation measure.
With financial markets already pricing in a near 70% probability of the Fed raising interest rates by a quarter point next month, any upside surprise in the PCE reading threatens to ignite a new round of forced sell-offs in long-term government securities.
