Global Government Bonds Sell Off; Yields Hit 2015 Highs

Government Bond Still ShakyBond yields rose in early trading on Friday, June 12 on investors’ fears that central banks could begin hiking interest rates later this year.

The yield on the benchmark 10-year U.S. Treasury note rose to 2.4% Friday morning, up nearly 40 basis points from the previous close. Benchmark 10-year Greek, Italian, and Spanish bonds saw yields nudge up higher on default fears, sending investors into traditional safe havens like German Bunds.

The sharp U.S. bond sell-off is a response to sturdy U.S. economic reports. Strong jobs data published earlier in the week suggest the country’s economy is recovering faster than originally expected. Economists fear a business recovery could force the U.S. Federal Reserve to dial back its stimulus measures, sending rates even higher.

A sharp rise in bond yields could jeopardize global economic growth, which is not yet fully recovered following the 2008 financial crisis. Higher interest rates on government bonds have already trickled down to the broader economy. U.S. mortgage rates have reached their highest levels in 18 months, auto loans are getting a bit more expensive, and corporations across the board have seen their borrowing costs jump.

Equity investors are also getting worried about higher interest rates. As bond yields rise, relatively more risky stocks become a less attractive alternative for income. Equity prices generally have to fall to compensate investors for the extra risk.

All eyes are now on the U.S. Federal Reserve for clues as to where interest rates are going next. On June 16 and 17, the central bank will meet to discuss monetary policy, which will include a news conference from Chair Janet Yellen. If the momentum is sustained, the Federal Reserve could begin to hike interest rates later in the year; possibly in September.

Also Read: Who Will Buy Our Bonds When Fed Stops Funding Government?