Bond Market Turmoil Sees 30-Year US Treasury Yields Break 5% Again

TradingKey - On Wednesday, September 3, the bond market continued the global sell-off from the previous day: the yield on 30-year Japanese government bonds hit a historical high, German long bond futures fell for the fifth consecutive trading day, and the 30-year US Treasury yield surpassed 5% for the first time since July. Analysts caution that the 5% yield is a critical threshold for 30-year US Treasuries that warrants vigilance.

Barclays remarked that this is almost a perfect storm, as concerns loom that current fiscal policies could trigger inflation, potentially leading to more global bond issuances amid insufficient demand.

This sell-off coincides with what is referred to as the "black September" for bonds. Historical data shows that September marks the worst monthly performance for global government bonds, with a median decline of 2% for bonds with maturities over ten years over the past decade. Jefferies attributes this to the issuance scale, noting that bond offerings are relatively low in July, August, and after mid-November. The imbalance in supply affects bond prices, driving yields higher.

Moreover, according to Wall Street forecasts, the issuance of US investment-grade corporate bonds could reach $150-180 billion this month alone, offering investors higher returns compared to government bonds and diverting funds from the bond market.

Currently, market focus is shifting to the US August non-farm payroll report due this Friday, marking potentially the last crucial data before an anticipated rate cut this year. The report could influence rate cuts, thereby determining the bond market direction. Analysis suggests that if employment data is weak, expectations for a September rate cut will solidify and could even shift towards a 50 basis point cut.

However, some analysts remain skeptical that the August non-farm payroll data will dictate monetary policy. Bank of America Merrill Lynch analyst Shruti Mishra believes that even stronger-than-expected employment growth may not alter market expectations for a September rate cut, as underlying weakness signals are evident, and Federal Reserve Chair Jerome Powell previously conveyed a dovish stance at the Jackson Hole conference, indicating that exceptionally robust data would be needed to halt a rate cut in September. The report suggests that the market will focus on revising the July non-farm payroll figures.

Regarding the upcoming annual benchmark revision of non-farm data, Nomura anticipates that both the market and the Federal Reserve expect a significant downward revision. Nomura believes this adjustment will have limited real impact on monetary policy, as expectations have already been priced in. Nomura maintains an expectation of a 25 basis point rate cut per quarter starting in September but does not foresee a substantial 50 basis point cut or cuts at consecutive meetings unless massive layoffs or severe financial stress occur.

Overall, for the global bond market, especially long-term bonds, rate cuts could mean a sigh of relief and potentially a sustained rise in prices. If the data unexpectedly shows strength, it could heighten fears of high interest rates, exacerbating bond sell-offs.

Nonetheless, some analysts argue that central bank rate cuts may only provide "temporary relief." As bond market pricing shifts from central bank anchors to fiscal anchors, without sustainable fiscal solutions from countries, the long-term trend of rising interest rates cannot be reversed.

John Briggs, Head of US Interest Rate Strategy at Natixis North America, has expressed serious concerns about global long bond yields, suggesting that the 30-year US Treasury may only pause slightly around 5% before continuing to rise. He sees rate cuts as a "rather straightforward recipe for a steepening Treasury curve" in the context of high inflation.