Fiscal Fears, Central Bank Policies Send Jitters Through Global Bond Market

A trader works on the floor of the New York Stock Exchange on Dec. 18, 2024. AP Photo/Richard Drew

Government bond yields have sharply increased across almost all advanced economies, diverging from central banks’ easing policies and exacerbating indebted nations’ fiscal pressures.

When the U.S. Federal Reserve launched its rate-cutting cycle in September 2024, the consensus among market watchers was that yields would begin to ease. However, there has been a vast divergence between the central bank’s interest-rate reductions and the government bond market.

The benchmark 10-year yield has surged 111 basis points since September 2024, to 4.77 percent, the highest since October 2023.

Longer-term yields have also risen to levels unseen in more than a year. The 20- and 30-year Treasurys have climbed a whole percentage point to peek through the 5 percent looking glass.

Wall Street analysts have presented various theories about the developments.

The hotter-than-expected December 2024 jobs report afforded Fed officials the luxury of postponing the next interest rate cut.

With U.S. economic growth remaining intact and inflation data signaling renewed price pressures, the central bank has shifted its focus to the other side of its dual mandate: restoring price stability.

Investors expect the Fed to maintain interest rates at this month’s policy meeting. The CME FedWatch Tool indicates that the futures market forecasts the next quarter-point rate cut for June.

Byron Anderson, head of fixed income at Laffer Tengler Investments, said that moving forward, the Fed might need to abandon hopes of rate cuts.

“Blowout jobs report should get the Fed to stop talking about the need for hundreds of basis points more of rate cuts,” Anderson told The Epoch Times via email. “This Fed had the wrong instincts about inflation, and now have the wrong instincts about the soft landing they already achieved.”

In addition to monetary policy conditions, economists have monitored other macro factors raising government debt costs.

Torsten Slok, Apollo’s chief economist, cited emerging concerns surrounding U.S. fiscal sustainability.

Following President-elect Donald Trump’s election victory in November 2024, Treasury yields spiked, fueled mainly by fears that budget deficits would swell and the federal government would be forced to borrow more.

“Combined with the significant decline in the Fed’s Reverse Repo Facility (RRP) usage and the dramatic increase in T-bill issuance in 2024 (which needs to be rolled over into longer duration), the risks are rising that rates markets will be more volatile in 2025,” Slok told The Epoch Times via email.

The Fed’s RRP, or reverse repurchase agreement, manages the money supply and establishes a floor for short-term interest rates. The practice involves selling securities to banks with an agreement to purchase them again later.

RRP usage has fluctuated significantly in recent months as the central bank trimmed the reverse repo rate amid its easing cycle.

Federal Reserve Chairman Jerome Powell prepares to deliver remarks in Washington on Nov. 8, 2023. Chip Somodevilla/Getty Images

According to the October 2024 Marketable Borrowing Estimates, the Treasury Department is projected to borrow $1.34 trillion in the first half of fiscal year 2025.

Outstanding Treasury debt exceeded $36 trillion in late 2024, up from $23 trillion before the COVID-19 pandemic. The government relies more on debt to finance federal spending and manage bloated deficits.

Officials have issued more Treasury bills—short-term debt obligations with terms ranging from four to 52 weeks—accounting for nearly one-quarter of debt, higher than the Treasury Borrowing Advisory Committee’s recommendation of 15 percent to 20 percent.

Dave Novosel, senior bond analyst at Gimme Credit, said that whether the 10-year bond can jump to 5 percent for the first time since October 2023 will depend on how the inflation story plays out.

“Unless inflation subsides even further, we expect bond yields to remain higher than in 2024,” Novosel told The Epoch Times. “The 10-year bond could reach 5 percent, but it would take material inflation to remain there through the end of 2025.”

According to the Federal Reserve Bank of Cleveland’s Inflation Nowcasting model, the upcoming consumer price index report is expected to show that the annual inflation rate has increased for the third consecutive month, hitting 2.9 percent.

But while these trends influence the direction of Treasury yields, why is the global bond market also witnessing increasing rates?

Forging a Bond Across the Pond

Government bond yields in Europe and Asia have surprised the financial markets.

Borrowing costs in the UK have surged by about 100 basis points over the past year.

The yield on a 30-year gilt, sitting at 5.42 percent, is at its highest since 1998. The 10-year gilt is at a 17-year high.

Strategists at Schroders, an asset management company, said UK investors have focused on Chancellor of the Exchequer Rachel Reeves’s first budget in October 2024, fearing that it would revive inflation rather than affect growth.

“A combination of changing the fiscal guardrails that limit government borrowing, an emphasis on front loading additional government spending (incurring higher spending at the outset of a fiscal period), and a decision to fund this (in part) by raising National Insurance taxes for businesses, significantly contributed to the recent rise in yields,” Schroders said in a recent note.

France, Germany, and Italy have contracted a case of bond market jitters.

Inflationary concerns from Trump’s tariff proposals, gloomy fiscal pictures, and competition from accelerating U.S. Treasurys have lifted yields across the eurozone.

In addition, sticky inflation could force the European Central Bank to slam the pause button, keeping the chief policy rate higher for longer, at 3.15 percent.

The eurozone’s annual inflation rate increased for three months, reaching a five-month peak of 2.4 percent in December 2024. Services inflation, which recorded 4 percent, has contributed to stubborn inflation.

In 2023, the Bank of Japan (BOJ) announced that it would remove a hard ceiling on 10-year government bonds, effectively ending the yield curve control era that began in September 2016.

Bank of Japan Governor Kazuo Ueda attends a news conference in Tokyo on April 28, 2023. Issei Kato/Reuters

In 2024, the Japanese central bank ended negative interest rates and bolstered its short-term rate target to 0.25 percent.

At the December 2024 policy meeting, the BOJ left interest rates unchanged. Bank of Japan Governor Kazuo Ueda cited uncertainty regarding U.S. trade policy and the need to await additional wage data.

Still, speaking at a recent event hosted by a banking sector lobby, Ueda signaled that rate hikes were ahead.

“If economic and price conditions continue to improve, the BOJ will raise its policy rate accordingly,” he said. “The timing for adjusting the degree of monetary support will depend on economic, financial, and price developments in the future. We also must be vigilant to various risks.”

While the BOJ’s keeping interest rates unchanged last month surprised economists, a recent Reuters survey of analysts suggests that the BOJ will likely raise rates to 0.5 percent sometime in the first quarter.

ING strategists said the debate is whether a rate increase will occur in January or March.

“We believe that recent data—including solid consumption, 2 percent above inflation for a considerable period, and continued healthy wage growth—support a January hike,” they said in a note. “Also, there have been encouraging signs already that next year’s wage growth will be almost as strong as this year’s from early wage talks of some large companies.”

Because of the institution’s tightening, Japanese government bond yields have been trending higher over the past two years.

The two-year note’s 0.66 percent yield is the highest since 2008, and the 10-year bond yield is above 1.2 percent, the highest since 2011.

Reuters contributed to this report.