Investors dump bonds globally as U.S. credit downgrade, Trump's tax bill ignite fiscal worries

CNBC

22-05-2025

A sell-off in global bonds is accelerating as Moody's downgrade of U.S. credit rating and President Donald Trump's tax bill has brought to fore investors' fiscal concerns globally.
Events such as credit rating downgrades or budgets that risk expanding deficits tend to bring fiscal concerns front and center of investors' minds, forcing them to reprice long-end risk, said Rong Ren Goh, Portfolio Manager, Fixed Income, Eastspring Investments.
While Trump was unable to sway GOP dissenters to support his broad tax bill that could drive U.S. debt higher by a projected $3 trillion to $5 trillion, it appears to have triggered a global bond rout.
"Markets do not find Trump's "big, beautiful tax bill" beautiful at all," said Vishnu Varathan, a managing director at Mizuho Securities. "USTs were beaten up in an ugly sell-off."
The U.S. 30-year Treasury yield broke above the key 5% mark for the second straight day, breaching the level last reached in November 2023. It is currently holding at 5.088%. The benchmark 10-year Treasury yield has climbed over 15 basis points since the start of the week.
The sell-off in Treasurys comes on the back of the exodus in American assets in April, and is largely owed to investors' declining confidence in U.S. assets, said market watchers.
When investors dumped U.S. Treasuries last month, they turned to bonds in Japan and Germany. This time, the Treasury sell-off is accompanied by investors exiting bonds across several major markets.
The sell-off in long-duration bonds in each market has been driven by distinct factors, with the common thread being a growing unease with worsening fiscal trajectories. "These concerns are prompting a reassessment of the term premium required to hold longer-dated bonds," said Goh.
Japan's 40-year government bond yield hit a record high of 3.689% Thursday. The country's 30-year government bond yield has also been hovering near all-time highs at 3.187%.
The yield on Japan's benchmark 10-year government bond has climbed 9 basis points to 1.57% so far this week.
The rapid steepening of Japan's government bond yield curve is owed to several reasons, but the key one is structural. Japanese life insurance companies, who used to buy long-term bonds in droves to comply with certain solvency regulations are no longer doing that, as they have largely met the regulatory criteria, according to Bank of America.
Additionally, the Bank of Japan's inclination to tighten its monetary policy, which collides with the Asian nation's fiscal woes, also have a hand in fueling the bond sell-off, said Varathan.
The sell-off in Japanese government bonds poses a bigger problem for U.S. sovereign debt. "By making Japanese assets an attractive alternative for local investors, it encourages further divestment from the U.S.," George Saravelos, Deutsche Bank's global head of FX strategy wrote in a note.
German government bonds — known as bunds — are also being dumped. Yield on 30-year German debt are up over 12 basis points, while the 10-year yield is up over 6 basis points.
"The removal of the German debt brake in tandem with continental re-armament, alluding to an end of Europe's pro-austerity bias and a revival of regional growth prospects were, arguably, the catalyst for the process [bond sell-off]," said Philip McNicholas, Asia strategist of the global macro fixed income team at Robeco.
German bunds are also pressured by wider deficits, which are likely to be structural, Mizuho Securities' Varathan said.
The 30-year Europe government bond yields have climbed over 12 basis points this week, and the 10-year yields are up about 7 basis points.
"Investors don't really have much love for long duration bonds right now," Steve Sosnick, chief strategist at Interactive Brokers told CNBC.
Concerns about global inflation are also a "killer" for longer bonds, said Sosnick, adding that shorter duration bonds are typically influenced by central bank policy, while longer duration debt is influenced more by investor expectations about the future of the economy.
Bonds in some emerging market have bucked the wider trend though, with their yields dropping.
India and China's 10-year bond yields have slipped, largely as they are more domestically-oriented markets, and in part because of their capital controls, said McNicholas.
India's 10-year government bond yield inched lower by about 2 basis points since Monday, while China's 10-year yield also slipped marginally.
"Foreign investors and global factors are far less relevant determinants for their respective yield curves," he said.