By Amanda Cooper, Yoruk Bahceli and Gertrude Chavez-Dreyfuss
LONDON/NEW YORK – The strong sell-off in some of the world’s largest government bond markets and the continued rise of the dollar have caused shocks in the financial markets, with pain that seems to be increasing as uncertainty grows about the policies of the President-elect of the United States, Donald Trump.
On Wednesday, the US, which supports billions of dollars in daily global trade, jumped to more than 4.7%, the highest since April, and peers in the UK took the biggest hit since 2008.
This sparked a fresh wave of selling in currencies against the greenback, including sterling, which fell more than 1% before recovering slightly, and the euro, which was heading for the $1 mark.
The party, which played a role in Trump’s victory, has recently begun to falter, although it has regained some of these losses.
Trump, at a press conference at Mar-a-Lago on Tuesday, criticized high US interest rates even though the Federal Reserve is in the middle of an easing cycle.
“Inflation continues to rise, and interest rates are very high,” the president-elect said.
Central banks have all but declared victory over inflation in 2024, but a number of metrics show price pressures are rising again.
Trump’s plans for higher trade tariffs, tax cuts and deregulation threaten to increase inflation and squeeze government funds, thereby limiting the Federal Reserve’s scope to lower interest rates.
“The bond market feels like it has lost faith in the Fed and the Treasury,” said Byron Anderson, head of fixed income at Laffer Tengler Investments in Scottsdale, Arizona.
“Short sellers are now the captain of this boat and there is a lot of pressure on this market. We are starting to see sloppy Treasury auctions with tails everywhere on the curve,” he added.
US auctions of three-year and 10-year notes this week were weak, with prices higher than expected during the tender deadline, reflecting weak demand. This suggested that investors demand a premium to buy Treasury notes.
WAVES OF GIVING
Some governments are busy fixing their own finances and boosting their economies, while increasing bond sales.
Longer-term yields, which tend to be less affected by short-term changes in monetary policy expectations, have risen in multi-year terms around the world, partly due to a rising wave of new bonds this year.
Laffer Tengler’s Anderson cited an estimated $14.6 trillion in Treasury debt maturing over the next two years, meaning most of the debt will be extended beyond one year.
Traders say the incoming Trump administration will need to shift its current focus on over-reliance on short-term debt.
The yield on the 30-year Treasury bond rose 60 basis points in a month – the biggest increase since October 2023. It is now dangerously close to 5%, a level rarely seen in two decades.
This has pushed the 30-year yield premium over the two-year yield to a nearly three-year high – a dynamic known as “curve steepening”.
“There’s a large pipeline of bonds that need to be sold, so that gives you an upward curve and a higher term premium for longer bonds. I think that’s one of the big drivers,” he said. Danske Bank (CSE:) senior analyst Jens Peter Soerensen.
UK 30-year yields have hit their highest level since 1998 at around 5.4%, adding to concerns about the impact of higher borrowing costs on Britain’s already weak government finances.
