Global government bond sell-off! 30-year US Treasury yield returns to 5%—what happened?

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A global wave of government bond sell-offs is underway, pushing the yield on the 30-year U.S. Treasury bond once again toward the key psychological threshold of 5%.

On Tuesday, the sell-off swept across both sides of the Atlantic, as government bond markets in the United States, the United Kingdom, Italy, and France all came under simultaneous pressure, with yields generally rising.

The yield on the 30-year U.S. Treasury rose by 5.3 basis points to 4.97%, and the yield on the 10-year Treasury also climbed 4.9 basis points to 4.276%. The bond market's pessimism quickly spilled over to equities, dragging the S&P 500 index down by 0.7%, its worst single-day performance since August 1st.

Behind this market turmoil are a massive supply of corporate bonds, deep concerns over government fiscal conditions, and the intertwining effects of seasonal liquidity tightening and other factors.

This sell-off coincides with the start of September, a traditionally unfavorable month for holders of long-term bonds. As traders return from the summer holidays, they face a wave of corporate bond issuance as their first shock.

According to Wall Street forecasts, the volume of U.S. investment-grade corporate bond issuance alone could reach $150–180 billion this month, providing investors with a large amount of higher-yielding options outside of government bonds, directly diverting market funds.

Currently, the market’s focus is shifting to the U.S. August jobs report, to be released this Friday. This key data will not only reveal the true health of the U.S. economy but will also directly affect the Federal Reserve's rate decision at its September meeting, thus providing key guidance for the next move in the global bond market.

Massive Corporate Bond Supply Jolts the Market

The most direct trigger for Tuesday's sharp fall in Treasury prices may be that investors are facing too many options.

Traditionally, September is the second-biggest month for U.S. high-grade companies to issue bonds, second only to March, and this year is likely to surpass even that.

According to Robert Martin, an analyst at Informa Global Markets, Wall Street forecasts for September’s investment-grade bond issuance are as high as $150–180 billion, likely to surpass last year’s $172.55 billion for the same period, setting a new decadal high.

Mike Cudzil, portfolio manager at Pacific Investment Management Company (Pimco), said, “Part of the reason yields are rising is simply a sheer amount of issuance that the market has to digest.” This week alone, about $60 billion in U.S. investment-grade corporate bonds are expected.

Mike Lorizio, head of U.S. rates and mortgage trading at Manulife Investment Management, called it an “endlessly busy primary market for all different spread products,” where investors need to free up positions to absorb the new supply.

This trend isn’t limited to the U.S.; Josh Rank, portfolio manager at Principal Global Investors, noted that corporate bond issuance in Europe is also active this week.

Fiscal Deficit Worries Behind the Global Sell-off

This round of bond market turmoil is notably global in nature. Besides the U.S., government bonds in the U.K., Italy, and France were also sold off on Tuesday, with yields rising across the board.

In particular, the yield on the U.K.’s 30-year government bond hit its highest level since 1998, while the yield on France's equivalent bond also increased by 6 basis points.

Behind this phenomenon are deep concerns about the fiscal health of developed economies. Massive government fiscal spending after the pandemic has forced many governments to issue more bonds to finance deficits.

Kathy Jones, Chief Fixed Income Strategist at Charles Schwab, told Bloomberg TV: “The bond market is telling you, it's worried about the path it’s on—not just here, but everywhere.”

Danny Zaid, portfolio manager at TwentyFour Asset Management, believes the environment has changed. For many years, there was an “automatic” structural demand for government bonds, but now, “governments of developed markets need to prove themselves to investors to earn their confidence.”

Liquidity ‘Draining’ and a Historic Curse

In addition to supply pressures and fiscal concerns, technical liquidity factors and historical patterns are also casting a shadow over the bond market in September.

According to data compiled by Bloomberg, over the past decade, the median monthly performance in September for global government bonds with maturities over 10 years is a 2% decline—the worst of the year.

Ed Al-Hussainy, interest-rate strategist at Columbia Threadneedle Investment, also believes, “Historically, September is a bad month for duration risk.”

At the same time, according to Barclays Bank research cited by Wind Trading Desk, the U.S. market will face a dramatic liquidity “drain” in September. The report predicts that, due to the U.S. Treasury rebuilding its cash account (TGA), quarterly tax payments, and Treasury coupon settlements—all converging—almost $200 billion in bank reserves could be drained on September 15 alone.

However, Barclays believes that, since the market has shown resilience and the Fed has deployed the Standing Repo Facility (SRF) as a “safety net”, the likelihood of a systemic funding crisis is very low.

Market Focuses on the Fed and Employment Data

Currently, market focus is concentrated on Friday’s U.S. jobs report, the last key employment data before the Fed’s September policy meeting. For now, traders put the chance of a rate cut this month at about 92%.

Fed Governor Christopher Waller said last week he supports a 25-basis-point cut in September, though he added that if this week’s jobs report “points to a significant weakening of the economy,” his view could change. John Briggs, head of U.S. rates strategy at Natixis North America, believes if the report is weak again, “the market will start to consider how likely a 50-basis-point cut is.”

This report will become the key short-term variable for market direction. Strong data could intensify market worries over “higher-for-longer” rates, escalating bond selling; while weak data could firm up expectations for rate cuts and offer some breathing room for the battered bond market.

Risk Warning and DisclaimerThe market involves risks and investment requires caution. This article does not constitute personal investment advice, nor does it take into account the individual user's specific investment goals, financial situation, or needs. Users should consider whether any opinions, views, or conclusions in this article fit their specific circumstances. Investments made accordingly are at your own risk. ```