It’s, once again, time to talk bonds.
Driving the news: Tumult in the global bond market has continued apace this week, as yields for 10-year U.S. Treasuries reached their highest levels since October 2023 yesterday while U.K. 10-year yields reached an 18-year high before cooling slightly later in the day.
As a reminder, bonds let governments raise money from investors, promising yields (returns plus interest) after a fixed period. Yields go up when they’re less attractive.
Why it’s happening: There’s a mile-long list of reasons why yields might be up — an asset strategist told the Financial Times he had never seen “this range of diversion in opinions” on the subject — including the war in Iran and oil prices, handwringing over government debt loads, and AI companies hogging up capital. However, there could be deeper-rooted issues.
Zoom in: There was arguably a global bond bubble in the 2010s that popped during 2022’s inflation spike (as inflation drives down bond values). We now seem to live in a permanent state of inflation fear, which — alongside other factors like more hedge funds holding bonds — has turned what was seen as the safest asset into a riskier one.
In times of general stress (like right now), money is supposed to flow into bonds, but it keeps flowing into equities. Likewise, higher bond yields are supposed to depress equities too as they raise borrowing and capital costs, but that isn’t really happening.
Why it matters: The bond market sneakily undergirds the entire global financial system, setting the cost of money, creating liquidity, and facilitating government spending. Fundamental changes in it would affect everything, including mortgages and your investment portfolio.—QH
