By Amanda Cooper and Yoruk Bahceli
LONDON (Reuters) – A sharp sell-off in some of the world’s biggest government bond markets and a rise in the dollar are sending shockwaves through financial markets, with the pain deepening as uncertainty over Donald Trump’s policies grows.
On Wednesday, the yield on 10-year government bonds, which underpin trillions of dollars in daily global transactions, rose above 4.7%, the highest level since April, and British peers hit their highest level since 2008.
This unleashed a new sell-off in currencies, including sterling, which fell by more than 1%, and the euro approached the $1 mark.
Central banks have all but declared victory over inflation in 2024, but a number of figures show that price pressures are increasing again.
Trump’s plans for higher trade tariffs, tax cuts and deregulation threaten to drive up inflation and put pressure on government finances, also limiting the Federal Reserve’s ability to cut interest rates.
“The start of 2025 was never going to be easy given the flood of bonds and policy announcements from the incoming US administration,” said Societe Generale strategist Kenneth Broux.
“Conditions are developing for a bond tantrum and yield overshoot. We are looking at 5% in ten seconds,” he added, referring to the 10-year yield.
The S&P 500, which recovered after Trump’s victory, is starting to falter.
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Other governments are busy repairing their own finances and strengthening their economies while ramping up bond sales.
Long-term yields, which tend to be less sensitive to short-term swings in monetary policy expectations, have reached multi-year highs globally, partly due to this year’s flood of new bonds.
Thirty-year government bond yields have risen 60 basis points in a month – the biggest increase since October 2023. They are now dangerously close to 5%, a level rarely seen in the past twenty years.
This has pushed the premium of the 30-year rate over the two-year rate to the highest level in almost three years – a dynamic known as “curve steepening.”
“There’s a big pipeline of bonds to be sold, so that gives you a steeper curve and a higher term premium on longer bonds. I think that’s one of the key drivers,” said Jens Peter Soerensen, chief analyst at Danske Bank.
Yields on UK 30-year government bonds have reached their highest level since 1998 at around 5.4%, adding to concerns about the impact of higher borrowing costs on the UK government’s already shaky finances.
(Additional reporting by Harry Robertson; Editing by Dhara Ranasinghe and Elisa Martinuzzi)