Global bond selloff deepens as hopes of multiple Fed rate cuts dash

A sell-off in global bond markets is accelerating, fueling worries about government finances and raising concerns about rising borrowing costs for consumers and businesses around the world.

Global bond yields mostly rose as investors reassessed the pace of possible interest rate cuts by the Federal Reserve, with the U.S. 10-year Treasury yield hitting a 14-month high of 4.799% on Monday.

In the UK, 30-year yields are hovering at their highest levels since 1998, and the country's 10-year yield recently hit its highest level since 2008.

London Stock Exchange data shows that Japan has been working hard to normalize monetary policy after ending the negative interest rate system early last year, and its 10-year government bond yield has risen by more than 1%, hitting its highest level in 13 years on Tuesday.

In the Asia-Pacific region, India's 10-year government bond yields rose the most in more than a month on Monday, approaching a two-month high of 6.846%. Yields on benchmark 10-year government bonds in New Zealand and Australia are also near two-month highs.

The only exception? China. The country's bond market has been rising sharply despite attempts by authorities to cool the rally. China's 10-year bond yield fell to a record low this month, prompting the country's central bank to suspend government bond purchases on Friday.

Market watchers told CNBC that bonds are being affected by a combination of factors.

Investors now expect the Fed to cut interest rates even less than before, and are demanding full compensation for the risks of holding bonds well into the future amid concerns about huge government budget deficits.

Last month, the Fed projected just two interest rate cuts in 2025, having done twice as many previously. Analysts said Friday's U.S. jobs report was stronger than expected, making the Federal Reserve's interest rate cut path more uncertain. Nonfarm payrolls rose by 256,000 in December, exceeding the 212,000 gain in November and exceeding the Dow Jones consensus forecast of 155,000.

Ben Emons, founder of FedWatch Advisors, said the U.S. economy is strengthening faster than expected, which means the Fed has less or no room to cut interest rates, and the bond market is reflecting that.

When interest rates rise, bond yields typically rise. Bond yields and prices move in opposite directions.

The odds of just one rate cut this year increased after the jobs report, according to CME Group's FedWatch indicator.

“After (last week's) jobs report, we were only expecting one or two rate cuts,” said Steve Sosnick, chief strategist at Interactive Brokers.

Additionally, rising government deficits have also led to bond sell-offs as more debt supply enters the market.

According to reports, the US government's deficit reached US$129 billion in December, an increase of 52% from the same period last year. UK public sector net debt (excluding public sector banks) is over 98% of GDP.

Zachary Griffiths, senior strategist at CreditSights, said there was even more selling in the UK gilt market for a similar combination of reasons. “Mainly it's because of financial uneasiness, but the fall in sterling also raises inflation concerns,” he added.

Sosnick said the impact of high yields on governments and businesses is relatively simple: “They're not good!”

Analysts say rising yields will increase the amount of money needed to repay debt, especially for governments running ongoing deficits.

In extreme cases, Sosnick said, “bond vigilantes” emerge and demand higher interest rates to cover these massive debts.

“Bond investors are calling on fiscal authorities around the world to rein in budget trajectories to avoid additional wrath,” said Tony Crescenzi, executive vice president at Pimco.

Frederic Neumann, chief Asia economist at HSBC, said on Monday that rising U.S. Treasury yields are also making it more difficult for some central banks to cut interest rates in the short term, citing Indonesia's central bank's recent decision to keep interest rates on hold as an example.

Another HSBC analyst said Asian currencies were also expected to depreciate sharply. The widening gap between Asian and U.S. government bond yields is causing capital outflows from Asia and fewer flows into Asia from the rest of the world.

It's not just governments that are affected by rising bond yields. Many companies base their borrowing costs on government bonds, and as government bond yields rise, so do their borrowing costs.

Since companies typically have to offer higher yields than corresponding government bonds to attract investors, their burden can be higher.

Potential impacts include lower profits or foregone opportunities, Sosnick said, noting that interest rates on corporate bonds are typically higher than on government bonds.

Emmons of FedWatch Advisors said rising yields cause borrowing costs to tighten, the dollar strengthens and stocks tend to fall, affecting consumer confidence, which in turn has a knock-on effect on housing and retail spending.

Market participants are currently awaiting the inauguration of U.S. President Donald Trump next week.

Industry observers told CNBC that the “real test” will come when Trump takes office next week, when a wave of executive orders on tariffs and immigration restrictions are expected.

Dan Tobon, Citi's head of G10 FX strategy, said the bond market is currently experiencing some “buyer strikes.”

“Because you're going to have more information in just a few weeks, why take a leap of faith now? So a buyer strike means yields will continue to rise sharply,” he said.

“If these are seen as triggering inflation or having a negative impact on the budget deficit, the rout could continue,” he added. Conversely, if policies are relatively dovish, bonds could stabilize or even reverse, he said.