Bond market rout deepens as inflation fears keep rising
Good morning, and welcome to our continuous coverage of business, financial markets, and the global economy.
The bond market is fulfilling its traditional role of reflecting economic stress, as investors react to escalating concerns over an inflation shock linked to the conflict in Iran.
The bond sell-off that dominated markets last week is persisting this morning, increasing government borrowing costs from Tokyo to Washington DC.
With the Strait of Hormuz largely closed, the likelihood of prolonged shortages in oil and gas supplies is rising, which would elevate costs across energy, transportation, and food sectors.
Last Friday, global government borrowing costs surged, with the yield (interest rate) on Japan's 30-year bond reaching 4% for the first time.
US and eurozone debt also declined, as traders anticipated that central banks would be compelled to raise interest rates or abandon expectations of rate cuts to counteract inflationary pressures impacting the global economy.
First, even if the war were to end tomorrow, energy prices may not fall as far as many expect. Significant drawdowns in oil inventories are likely to keep upward pressure on prices for some time yet.
Second, natural gas prices currently look too low. There is meaningful upside risk if disruptions persist into the third quarter, particularly as competition intensifies between Asian and European buyers for LNG.
This underscores that despite political developments, energy prices remain the primary concern for central banks. This is why rate hikes are anticipated from the Bank of England and European Central Bank in June, and why a Federal Reserve rate cut is no longer expected until December.
This morning, US and Japanese government bonds have extended their losses, pushing yields higher (yields increase when bond prices fall).
Benchmark 10-year U.S. Treasury yields rose to their highest level since February 2025 at 4.6310% this morning.
Yields on the 30-year Japanese government bond reached a record high of 4.200%, while the 10-year yield hit its highest since October 1996 at 2.800%.
The agenda
Today: G7 finance ministers convene in Paris.
10am BST: IMF to present its Article IV report on the UK.
China heading for slowdown after April's economic data disappoints
Weak economic data from China is causing concern among investors this morning.
Chinese factory output growth slowed to 4.1% year-on-year in April, down from 5.7% in March, according to data from the National Bureau of Statistics (NBS). This occurred despite a surge in exports as customers sought to stockpile goods to mitigate supply disruptions from the Iran conflict.
Retail sales growth decelerated to just 0.2% in April—the weakest since December 2022—down from 1.7% in March.
China’s fixed asset investment declined by 1.6% year-on-year in January-April, a reversal from a 1.7% increase in January-March.
Lynn Song, ING’s chief economist for Greater China, says:
It suggests a steep drop-off of investment in April as geopolitical uncertainty may have weighed on investment decisions.
This disappointing April economic activity suggests growth will decelerate in the second quarter, after the first quarter comfortably beat expectations.
Oil at near-two-week high
Oil prices have risen this morning, adding further pressure on government bond prices.
Brent crude increased by 1.77% to $111.16 a barrel, marking its highest level in nearly two weeks.
Concerns over the Iran conflict intensified after a nuclear power plant in the United Arab Emirates was attacked over the weekend.
Tony Sycamore, analyst at IG, says:
These attacks serve as a pointed warning: any renewed US or Israeli strikes on Iran could quickly trigger more proxy assaults on Gulf energy and critical infrastructure.
French finance minister Roland Lescure disclosed that G7 finance ministers will address the bond market situation during their meeting in Paris today.
Lescure stated:
We are no longer in a period where public debt is not a subject.
He described the current global bond market movements as a correction rather than a collapse.
Burnham: I support the fiscal rules
The ongoing global bond market sell-off coincides with political uncertainty in the UK, making it a challenging time for British politics.
British government debt experienced significant losses on Friday, as Keir Starmer’s leadership faced turmoil and potential challenger Andy Burnham prepared to contest a seat in the North West of England.
Yields on 30-year UK government bonds reached their highest levels since 1998 last week, with 10-year gilt yields at their highest since 2008.
These losses occurred amid concerns that a change in Labour leadership could lead to increased government spending and borrowing, potentially abandoning fiscal rules designed to reassure bond markets.
However, Burnham sought to alleviate fears about increased spending:
I support the fiscal rules, there needs to be a plan to get debt down.
This commitment may provide some support for UK bonds today.
