Bond markets are having their biggest correction in a generation. The yield on the 30-year US Treasury, the interest rate the US government pays to borrow over three decades, hit 5.48% on Thursday, its highest since 2004, while the benchmark 10-year reached 5.20%. It isn't just the US either. Germany's 10-year yield hit a 17-year high this month, Japan's is at its highest since 1996, and UK borrowing costs are approaching a 19-year high.
The mechanics are simple enough. When investors sell bonds, prices fall and yields rise, because anyone still buying wants a higher return. Right now they want more because they expect inflation to stay high. The war on Iran has pushed oil above US$105 a barrel, and US business survey data showed input costs rising at the fastest pace in four years, meaning it's getting more expensive to make things and those costs usually get passed on. Markets now see roughly a 66% chance the Federal Reserve raises rates again in October.
The complication is that governments are borrowing more at exactly the wrong time. Germany expects record borrowing this year, and US Treasury Secretary Scott Bessent has been buying back long-dated bonds to bring yields down, with little success. Investors are now eyeing 6% on the US 10-year as the next pain point.
For Australia, our bond yields tend to follow the US, and they're rising too. AMP's Shane Oliver says a worst case would see US 10-year yields around 6% and a bit more in Australia, which he says would mean multiple RBA rate hikes, higher mortgage repayments and lower super balances for retirees. Super funds feel it directly, since falling bond prices cut into the bond holdings most balanced options carry.
It's not everyone's base case. CBA's Adam Donaldson thinks US yields are somewhere near their peak. But with oil still climbing and Trump giving little indication of when the war ends, whether bond investors are done selling remains to be seen.
