Global bonds rally after US Treasury moves to support the market
Global bond markets recovered during trading, with yields on long-term government bonds retreating from multi-decade highs after the US Treasury announced it would double the size of its bond repurchase operations aimed at supporting liquidity, a move that eased concerns about mounting pressures in the global debt market.
The US Treasury said it would raise the size of its repurchases of long-term nominal Treasury bonds to at least $4 billion per operation, up from the current $2 billion, a step that pushed yields on long-term US bonds down by as much as 10 basis points, with the effect rippling through to European markets.
The yield on the 30-year US bond had risen to around 5.34 percent, its highest level in approximately 20 years, amid growing concerns about inflation and rising government debt levels. Yields fell following the Treasury’s announcement, with long-term US bond yields dropping by up to 10 basis points, while yields on government bonds in Germany and France also declined, after having earlier reached their highest levels in 15 and 18 years, respectively.
Developments in the long-term bond market are significant because their yields serve as a key benchmark for pricing a wide range of assets and borrowing costs in the global economy, including mortgage rates and corporate financing.
Jeremy Stretch, head of currency strategy at CIBC, said the recent sell-off in the long end of the bond market had become a potential problem, with spillover effects spreading to other asset classes. He added that the US Treasury Secretary had to take these risks into account and make adjustments. The yield on the 30-year US bond fell sharply following the announcement, while the dollar also declined.
Pressure is not confined to the US debt market. Borrowing costs for long-term debt have risen across the US, Germany, and Japan, as investors worry about persistent inflation and rising government debt levels.
In Japan, the yield on 10-year government bonds approached 3 percent, a level not seen in three decades, a development of particular importance to global markets after years of reliance on low Japanese interest rates and the outflow of Japanese investment abroad.
Neil Fisher, an investment specialist at St James Place, said markets are facing two parallel questions: Will inflation remain at elevated levels for longer? And what does that mean for long-term interest rates? Meanwhile, questions are emerging about the sustainability of long-term government debt in the UK, Europe, and the United States.
