Global bond markets sold off sharply this week, with long-term government yields hitting decade-plus highs across major economies. On Tuesday, the 30-year US Treasury yield reached 5.2% – its highest since 2007 – while the 10-year Treasury pushed to 4.7%. The sell-off spread well beyond the US: 30-year UK gilts climbed to 6%, Japan's 30-year bond yield hit 4% for the first time in history, and yields rose across Germany and France.
Three main forces are behind the move. The conflict involving Iran has disrupted oil supply through the Strait of Hormuz, pushing crude above US$100 a barrel. Higher energy prices feed directly into inflation, which leads investors to expect interest rates to stay elevated for longer, making existing low-yield bonds less attractive and forcing yields higher. That inflation fear has also flipped rate expectations entirely: earlier this year, markets were pricing in cuts from the Fed and other central banks; now they're pricing in hikes. Adding further pressure, governments running large deficits are issuing record volumes of new debt, and investors are demanding higher returns to absorb it.
Australia has not escaped. On Wednesday morning, the 10-year Australian government bond yield touched 5.07% – its highest in 15 years. The RBA has already raised rates three times this year, with core inflation at 3.5%, well above its 2.5% target. But a surprise rise in unemployment to 4.5%, a four-year high, complicated things: weaker jobs data signals the economy is losing momentum, reducing the case for further hikes. That pushed the three-year bond yield, which tracks near-term rate expectations, sharply lower.
Globally, rising bond yields should push share markets lower – but with fund managers pouring record allocations into stocks, prices have kept climbing. History suggests that it can only last so long before rising borrowing costs win out. For Australia, the stakes are higher still. With unemployment rising, the property market cooling, and inflation stubbornly above its target, the RBA has little room to move in either direction. Cut rates, and you risk inflaming inflation further; hike again, and you risk tipping a weakening economy into something worse.
