What's Driving Volatility In Global Debt Markets | Profit Explainer
Japan's longer-dated bond yields have hit multi-decade high. The yield on the US 30-year treasury note has moving toward 52-week high amid fiscal concerns and inflation outlook.
Debt markets have grabbed investors' attention as yields on longer-dated debt notes have been hitting multi-decade highs in many developed countries. Fiscal concerns are driving the yields higher in debt markets.
Japan is the latest to join the global debt market slump. Its longer-dated bond yield surged to a multi-decade high, as reported by Bloomberg. Apart from worries over government spending and inflation, political uncertainty weighed on the sentiment.
Japan's Prime Minister Shigeru Ishiba's close aide, Hiroshi Moriyama, said that he will step aside to take responsibility for his party's loss in July's upper house election. Moriyama is the Liberal Democratic Party Secretary-General.
In the US, the yield on the 30-year treasury note has been steadily rising for four sessions. It is inching closer to the 52-week high of 5.15%, touched on May 22.
Europe witnessed its bond issuance reaching a record in Tuesday's session, with the UK and Italy offering big deals. Bond issuance rose to 49.6 billion euros, Bloomberg reported.
Corporate debt markets have also followed suit as companies rushed to book high yields. In credit markets, borrowers have sold $90 billion in investment grade on Tuesday. According to Bloomberg, a part of the global credit markets are reporting their busiest weeks.
Traditionally, September is a challenging month for debt markets. However, below are some reasons behind the spiked volatility in global debt markets.
Declining Trust On Sovereign Debt
Volatility in debt markets indicates declining trust in sovereign bonds. Poor debt metrics and an increase in spending indicate that governments may access the market for capital requirements, resulting in an increase in supply.
In the UK, the government is tasked with making up a budget amid rising borrowing costs. The fiscal concern weighed on the UK pound in Tuesday's session.
US Federal Reserve Policy Outlook
The US Federal Reserve is expected to deliver a 25-basis-point rate cut in the upcoming policy meeting. These expectations influence traders to buy short-term papers, which are most sensitive to monetary policy, which weighs on longer-dated bonds.
There is also a popular trading strategy called 'steepener', which traders apply to benefit from the wide spread between short-term and long-term bond yields amid rate-cut expectations.
The current federal fund target rate is at 4.25–4.50%. According to the FedWatch tool, 89% of traders are expecting a rate cut in the Federal Open Market Committee policy meeting starting from Sept 17.
Uncertainty On Macroeconomic Front
Investors are dealing with uncertainty in multiple front. On the trade font, concerns rose after US federal appeals court ruled that most tariffs US President Donal Trump has levied are illegal. The court has allowed the tariff to remain in place till Oct 14.
Although market participants are sure of a rate cut by the US Federal Reserve post Chair Jerome Powell's remarks at Jackson Hole Economic Policy Symposium, a lot depends on the economic data. US non-farm payroll data and inflation will be crucial in this regard.
Bloomberg survey is forecasting 75,000 jobs addition in August.
Moreover, mixed cues exists int he equity markets. Stock markets are moving near record highs in the US with rich valuations, which is being seen as 'erie calm' before storm by some market participants.
Historically, the S&P 500 index goes through a correction in September, according to Bloomberg.
Nevertheless, in next weeks, market participants will likely have a clear picture with more economic data insights and Fed policy outcome.
