EUROZONE BORROWING COSTS SURGE IN GLOBAL BOND ROUT / THE FINANCIAL TIMES

Eurozone borrowing costs surge in global bond rout

European debt hit with bout of selling after US 10-year borrowing costs strike highest level since 2002

Emily Herbert and Ian Smith in London, William Sandlund in Hong Kong and Leo Lewis in Tokyo

Eurozone borrowing costs surged on Thursday after the US 10-year yield touched its highest level in almost a quarter of a century as pressure from the Iran war’s energy shock on public finances intensified around the world.

Yields on 10-year Treasuries climbed as much as 0.05 percentage points to 5.34 per cent, a level last seen almost a quarter of a century ago, as traders warned the $32tn US government bond market, an anchor for global finance, was caught in a “vicious loop” of selling. 

They later rallied to 5.24 per cent, down 0.05 percentage points on the day.

Selling in the US spread across the Atlantic. 

UK 30-year gilt yields climbed above 6 per cent for the first time since 1998 but later eased to 5.93 per cent.

France, which has been a particular victim of the Iran sell-off that has combined with worries over domestic political risks, had its 10-year yield rise as much as 0.1 percentage points to 4.96 per cent, its highest level since mid-2002.

Meanwhile, Italy’s 10-year government bond yield was up 0.05 percentage points to 4.69 per cent, taking its spread with German debt to 1 percentage point for the first time since March.

Traders had been “dazzled” by the scale of the recent government bond sell-off, said Rob Subbaraman, head of global macro research at Nomura, adding that this was driven by higher inflation and concerns about the sustainability of government deficits.

The surge in yields has swept across the global economy, raising borrowing costs for consumers, businesses and governments. 

US conventional 30-year mortgage rates jumped 0.25 percentage points — the biggest increase in four years — to 7.28 per cent this week, according to Freddie Mac data released on Thursday.

Investors have warned that jumps in yields in recent trading sessions have been exacerbated by hedge funds and other big investors, which have been forced to ditch long-term debt to counteract the effect of rising rates on their broader debt portfolios, or to unwind lossmaking trades as the market has sold off.

Brent crude, the international oil benchmark, settled 4.4 per cent higher to $102.31 a barrel on Thursday, adding upward pressure to yields.

Mike Bell, head of market strategy at RBC BlueBay Asset Management, said: “You’ve got to a position where lots of people are getting stopped out of long positions or thinking: I don’t want to hold this as [the yield] keeps going up.”

The latest swings in Europe’s bond market came as the French government put forward a 2027 budget with €43bn of cuts and tax increases amid rising worries over the health of its public finances.

The euro dropped as much as 1 per cent to a 16-month low of $1.1214, buffeted by higher oil prices and what analysts said were rising risks from the bond market sell-off. 

European bank shares fell, with BNP Paribas down 3.6 per cent and Deutsche Bank falling 2.6 per cent.

Italy and other Eurozone government bonds were starting to suffer from “spillovers” from the French bond sell-off, said Pooja Kumra, rates strategist at TD Securities. 

“[The] moves have been significant and will need some vocal intervention from policymakers.”

European stocks fell as investors fretted over possible fallout from higher yields. 

The region-wide Stoxx Europe 600 stock index dipped 1.3 per cent while the FTSE 100 fell 1.7 per cent.

In the US, the S&P 500 closed 0.2 per cent higher and the Nasdaq 100 gained 0.3 per cent. 

Wall Street stocks have been relatively resilient to the sell-off in debt, buoyed by investors’ bullishness about the AI theme.

Harriet Ballard, a portfolio manager at Aviva Investors, said she remained positive on the equity market, despite the pressure from higher interest rates, because “AI-linked sectors have been better insulated by strong earnings”.

Bond markets have for months been racked by fears over the spectre of higher inflation triggered by the Iran war’s energy shock, which has pushed the relationship between oil prices and Treasury yields to its tightest point since 1990. 

This has been intensified by robust US economic data, which has further fed expectations of higher interest rates.

Traders are braced for further swings, with the ICE BofA Move index of implied volatility in Treasuries approaching the high reached in the first weeks of the conflict.

As the bond worries spread through Asian markets earlier on Thursday, Japanese 10-year bond yields rose 0.04 percentage points to 3.1 per cent, close to a multi-decade high.

Mitul Kotecha, head of Asian foreign exchange and emerging markets macro strategy at Barclays, said the pressure on Japanese bonds was down to “a combination of the contagion of what’s happening in the US market and, to some extent, uncertainty about [the Bank of Japan] tightening [rates]”.

“It’s the fiscal concerns that continue to play in the market,” he added.

Corporate credit spreads have also widened in recent days as investors worry that the volatility in government bond markets could spread into the credit markets that determine companies’ borrowing costs.

The additional interest rate paid by European investment-grade companies over government bond yields has ticked higher to almost 0.9 percentage points this week, the highest level since April, according to ICE BofA data.

“There is a risk that credit spreads follow [yields higher],” said Andrew Jackson, head of investment at Vontobel Asset Management.

Inflation data in several European countries — including Germany, France and Italy — on Wednesday showed higher price pressures than analysts had expected, adding to investors’ fears that the energy price shock is feeding through into economic strain, although US data showed a drop in the Federal Reserve’s preferred inflation measure.

Investors have been struck by a relentless march higher in global bond yields where problems in each market, including Japan, France and the US, are feeding off each other.

“As [yields] move up, they are pulling each other up,” said Guy Miller, chief market strategist at Zurich.