The global bond market is experiencing a "tale of two extremes": enthusiastic buying on one side, and frenzied selling on the other.
Source: Golden Ten Data
The global bond market is experiencing significant fragility and volatility. Governments in many countries are being forced to raise large amounts of capital in an environment of high debt and high interest rates. While investors are chasing high-yield products in the short term, they are concerned about the overall risk of the bond market in the long term, resulting in a paradoxical situation where there is both enthusiastic subscription and an overall market decline.
On Tuesday, the European bond market saw a record single-day issuance volume, with 28 issuers planning to raise at least 49.6 billion euros (equivalent to 57.7 billion USD), potentially breaking the previous single-day record of 47.6 billion euros set earlier this year.
On the other hand, the global bond market is facing new selling pressure. Inflation concerns, the volume of debt issuance, and issues of fiscal discipline are eroding investors’ confidence in what was once considered one of the world’s safest assets.
Record-breaking single-day issuance in the European bond market
Europe, especially the UK and Italy, has launched massive bond deals, kicking off a September financing boom after the summer lull. Despite ongoing fiscal concerns in countries such as France and the UK, high yields have attracted investors to place enthusiastic orders, driving huge subscriptions.
On Tuesday, the UK successfully raised over 10 billion pounds through a record 10-year government bond syndication, receiving more than 140 billion pounds in subscription orders and ultimately raising 14 billion pounds. Dan Shane, Head of European Debt Syndicate at Morgan Stanley, stated that international buyers accounted for 40% of the allocation, including a large number of international central banks actively participating for reserve management purposes. He emphasized that the new issue premium for this transaction was less than 1.5 basis points, indicating strong demand.
Meanwhile, Italy’s joint issuance of 13 billion euros in 7-year government bonds and 5 billion euros in 30-year government bonds attracted over 218 billion euros in subscription demand. French corporate borrowers also continued to raise funds ahead of next week’s government confidence vote, with Unibail-Rodamco-Westfield issuing 685 million euros in hybrid perpetual bonds.
This surge in supply reflects the traditional September rebound, as governments and companies return to the market after the summer holidays, aiming to complete financing ahead of schedule for the remainder of the year.
Although borrowing costs have risen from last month’s lows, banks and companies remain eager to enter the market, driven by the near-constant inflow of investment funds into bond funds over the summer. In addition, corporate bond spreads have slightly rebounded from last month’s historic lows.
Outside Europe, Saudi Arabia attracted about 15 billion USD in orders for its planned issuance of five-year and ten-year Islamic bonds, aiming to cover its fiscal deficit and promote the “Vision 2030” diversification plan. In Japan, at least seven companies have launched dollar bond sales, making this likely the busiest week for global debt issuance, with Japanese issuers expected to surpass 100 billion USD in total dollar and euro bond issuance for the first time this year.
Bond market sell-off continues to spread, long-term yields surge in many countries
However, the global bond market remains under overall pressure. Persistent inflation, doubts about fiscal discipline, and intensive government bond issuance have raised concerns about oversupply, pushing yields higher and depressing bond prices.
Long-term bond yields have surged to high levels in many countries. On Wednesday, Japan’s 20-year government bond yield rose to its highest level since 1999, while Australia’s 10-year government bond yield returned to its highest level since July. On Tuesday, the UK’s 30-year government bond yield climbed to its highest level since 1998.
Notably, US Treasury yields have also risen, with the benchmark 30-year Treasury yield approaching the closely watched 5% threshold.
Overall, this round of sell-off reflects traders’ concerns about high government spending and its potential inflationary impact. The large-scale corporate bond issuance on Tuesday and ongoing doubts about the Federal Reserve’s independence have further increased market pressure.
Andrew Ticehurst, a strategist at Nomura Holdings in Sydney, said:
“Deficit and debt issues cannot be easily or quickly resolved. A steeper yield curve will become the new normal.”
Ultra-long-term bonds typically perform poorly in September. The Bloomberg Global Bond Return Index fell 0.4% on Tuesday, marking the largest single-day drop since June 6. Although the decline was limited, it still highlights the market’s continued caution toward holding long-term debt.
The sell-off in long-term bonds has also fueled demand for so-called “steepener trades,” a strategy that profits when the yield spread between long- and short-term bonds widens. Recent precedents have shown that this trade can be profitable.
As pressure mounts for the Federal Reserve to cut rates, traders typically buy short-term Treasuries, which are most sensitive to changes in monetary policy. Fund managers such as Andrew Canobi at Franklin Templeton are positioning to bet that two-year Treasuries will outperform ten-year Treasuries.
Canobi said: “Inflation is being dragged back to target with difficulty, fiscal pressures remain significant, the overall job market is still solid, and central banks are beginning to cut rates in this context. We prefer to increase rather than reduce our positions.”
Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.
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