Treasuries went back into their autumn slump on Monday, with yields pushed to fresh multiyear highs by investors focused on deteriorating fiscal conditions in major economies worldwide and inflation tied to the Iran war.
Government bond markets from Japan, Europe, and the U.S. were feeling the fallout from France, where yields on its benchmark 10-year note climbed closer to 5%, the highest since 2002, and ramped the spread between its debt and similar bonds issued by Germany to the highest level in 15 years.
The trigger for the European meltdown is tied to budget proposals from France's minority government, which include big tax increases aimed at reducing the nation's deficit and trimming its longer term debt profile.
The plans sparked one of the biggest weekly selloffs in French bonds on record. The extra yield that investors demand for the paper over German debt rose the most since 1990.
That pressure seeped into the U.S. bond markets. Treasury yields were back on the march, despite last week's softer-than-expected jobs report that trimmed Federal Reserve rate hike odds and eased near-term inflation worries.
In early trading, the benchmark 10-year yield stood at 5.302%-the highest since 2007. The 30-year touched 5.659%, a level last hit in 2002.
That puts this week's slate of government bond auctions-the Treasury expects to raise$119 billion in sales of 3-year, 10-year and 30-year paper-at the top of investors minds.
Investors are demanding more compensation to hold longer term debt, a condition that traders refer to as "term premium," in part because of inflation pressures and hawkish central banks focused on higher interest rates.
"A big risk to bonds from fiscal policy is a period of above-target inflation that erodes the value of the debt," said Thomas Matthews, head of Asia Pacific markets at Capital Economics.
"But higher yields [whatever their initial cause] also put pressure on governments with poor fiscal positions," he added.
The U.S. government had a $2 trillion-plus deficit for the fiscal year that ended last Wednesday, according to projections from the Committee for a Responsible Federal Budget, a nonpartisan public policy group. That sum is about 6.2% of GDP.
That's nearly a full percentage point higher than France, and double that of Japan, which shoulders an overall burden of debt that is around 1.9 times more than its annual economic growth rate.
"As deficits remain high, debt continues to rise," the budget group said last week. "We estimate debt held by the public at the end of the fiscal year reached about $32.3 trillion, or 100% of GDP-the highest in any fiscal year other than 1945 and 1946, right after World War II."
The global yield surges, which have added more than 65 basis points to U.S. 10-year note over the past two months and some 77 basis points to France's 10-year OAT, are also leaning on stock performance.
The S&P 500 is largely flat over the same period, with only two-tech focused sectors in positive territory.
"That tells us something important: higher bond yields are already hurting equities," said Saxo Bank investment strategist Charu Chanana. "The pain is simply being masked by the strength of AI and megacap technology."
That has investors focused on the next move in bonds, with an eye to the market's key volatility index, the Merrill Lynch Option Volatility Estimate, over the coming week.
The MOVE index has risen more than 45% of the past two months, and was last pegged firmly north of the 100-point mark that suggests worrying bond market swings over the near term.
'The equity market doesn't need a large bond rally from here; a period of more stable yields would be enough," said Mike Wilson, Morgan Stanley's chief U.S. equity strategist.
"The main risk is a renewed spike in bond volatility that tightens liquidity and financial conditions," he added.