- France, Germany, UK, and US 10-year government bond yields have risen appreciably.
- Even typically stable Singapore bond yields have jumped.
- Room for central bank support to manage ballooning debt burdens in parts of EM and DM has shrunk.
- Interest payments to service 100%+ debt/GDP can become onerous swiftly.
- Interest in duration risk may remain weak.
Commentary: Soaring bond yields and the global economy
2025 has begun with a striking rise in bond yields. In the US, recession and unemployment fears have disappeared, inflation fears have reappeared, and public debt outlook has darkened. The strong economic numbers may be largely out of the US, but their impact has been widespread. In the span of seven trading days in the new year, France, Germany, UK, and US 10-year government bond yields have risen by 20, 10, 28, and 19 basis points respectively. Even the typically stable Singapore 10-year bond yield has moved up by 14bps.
Recent US dataflow points to a substantial narrowing of rate cut path for the Fed. Inflation concerns have returned with ISM non-manufacturing price pressure gauge at a 22-month high. The labour market is getting tighter, with the unemployment rate falling to 4.1%, labour force participation rate remaining high, and December nonfarm payrolls exceeding expectations by over 100k. Last year’s 100bps of rate cuts have been followed by a curve steepening, a striking indictment of Fed credibility, in our view.
Short-term rates remaining elevated due to price and jobs considerations is par for the course. What troubles us is the synchronised rise in long-term bond yields in so many major markets. This development points to the fiscal situation. An historic build up in debt over the past decade and a half has left the global economy vulnerable to high interest rates. Is 2025 the year when this risk rises appreciably?Key economies in the developed and emerging markets are characterised by very high debt ratios. Brazil, China, France, Japan, UK, and the US are looking at 100%+debt/GDP to deal with for years and decades to come. Germany and India are not in particularly comfortable positions either. We think the curve steepening taking place right now is a message from the markets that debt and deficit consolidation don’t seem to be around the corner. The result could be a destabilising one—as markets come to terms with the end of easy liquidity owing to inflation considerations, and related to that, no central bank purchase of bonds, they will demand higher and higher premium from the sovereign issuers. There could be plenty more pain ahead.
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