Government borrowing costs in several advanced economies hit their highest level since the 2008 financial crisis, or even earlier, on Monday as investors feared the Middle East crisis would keep inflation persistently high. Concerns over rising prices and government spending pushed up the cost of debt issued by Paris, Berlin, Washington DC, Tokyo and London as investors fretted that rising prices would push up interest rates.
French and German yields soar to multi-year highs
The yield, or interest rate, on 30-year French bonds rose to its highest level since September 2008 at 4.8558%, up one basis point (0.01 percentage point), LSEG data showed. France’s 10-year bond yield hit its highest level since June 2009, up 1bp to 4.0516%. The equivalent German bond rose to its highest yield since 2011 at 3.2138%, up 1.5bps.
Fears that central banks would continue to tighten monetary policy, to prevent inflation bursting out of control, pushed up bond yields as traders sought a higher rate of return for holding government debt. The money markets indicate there is almost an 85% chance that the European Central Bank will raise interest rates in September.
US and UK yields also climb
US government long-term borrowing costs hit their highest level since the financial crisis, with the 30-year Treasury yield rising to 5.29%, its highest level since 2007 – the year of the credit crunch that preceded the 2008 financial crisis. UK and Italian government bond prices, which fall when yield rise, also dipped.
The ongoing Middle East crisis pushed oil prices up by 6% last week, and Brent crude rose higher on Monday as the US and Iran struggled to end the conflict and Donald Trump again threatened to bomb Oman if it “gets in the way” of his effort to end the war.
Japan's bond yields hit three-decade high
Japan’s 10-year government bond yield hit a three-decade high, as investors anticipated the Bank of Japan would need to raise interest rates as soon as September in an attempt to prop up the value of the yen. The 10-year JGB yield rose to 2.93%, its highest level since September 1996, before dipping back slightly after Japan’s latest GDP report showed growth was weaker than expected in April-June.
Axel Rudolph, a chief technical analyst at IG, said: “Persistent yen weakness and inflation pressures are strengthening the case for action, while uncertainty over how the government will fund its proposed food tax cut adds another layer of fiscal concern. Japan’s bond market is clearly becoming less forgiving, and the BoJ may soon have to choose between supporting a fragile economy and containing inflation.”
