Summary of Key Points
This week, the global long-term bond market experienced a massive sell-off, with yields on 30-year government bonds from the United States, Germany, France, and Japan reaching new highs over the past 10 to 30 years. The reasons behind this include the U.S. government's structural high deficit, massive debt issuance leading to an oversupply of bonds, as well as persistent inflation and economic resilience that exceeded expectations. This sell-off not only increased the cost for governments to borrow money but also caused the U.S. stock market to decline continuously (with tech stocks being hit the hardest), and the effects spread to the Asia-Pacific region. It also raised mortgage rates, impacting the real estate market. However, the reaction in the U.S. stock market has been relatively mild so far, and experts believe that a further sell-off in the bond market is needed to trigger a significant correction in the stock market.
Why Did the Global Bond Market Suddenly Plunge? – Long-Term Bonds Have Become a Hot Potato
Simply put, bond prices and yields are like a seesaw: when everyone sells bonds, prices fall, and yields rise. The global sell-off of long-term bonds was mainly led by the United States:
- The U.S. government is borrowing too much: The fiscal deficit has consistently been around 5%-6% of GDP, with total debt approaching $40 trillion. The government needs to issue new bonds to repay old ones, and the supply far exceeds demand, so investors naturally demand higher yields to be willing to buy.
- Inflation and economic resilience are causing problems: Inflation is declining slowly (it's sticky), and the economy has not declined as expected. Investors worry that the Federal Reserve will not cut interest rates soon, meaning holding long-term bonds entails a longer period of inflation risk, thus requiring higher returns as a form of risk compensation.
- Tech companies are also competing for funds: Tech giants like Amazon and Google are issuing large amounts of long-term corporate bonds to build data centers, further increasing the supply of bonds and making it harder to sell them.
The decline in long-term bonds from Germany, France, and Japan is due to global capital flows: when U.S. bond yields rise, funds move from other countries' bonds to the U.S., leading to a sell-off in those countries' bonds as well.
Why Have U.S. Bond Auctions Become Such a High-Risk Event? – Borrowing Costs for the Government Are Rising
U.S. bond auctions used to be routine, but now they have become a market concern:
- Auction yields have repeatedly hit new highs: The recent 10-year U.S. bond auction yield reached 4.683% (a 19-year high), and the 30-year yield reached 5.216% (a 25-year high). This means that for every $100 borrowed by the government, it has to pay several extra cents in interest annually, increasing the long-term debt burden.
- Market concerns about the government's ability to repay debts: Investors no longer view the U.S. deficit as a short-term issue but consider it structural—the government spends more than it earns and will need to issue even more bonds in the future. Therefore, buying U.S. bonds now involves both inflation risk and the risk of the government's sustainability in borrowing.
In the words of experts: “The U.S. Treasury Department is now having to pay more to borrow money, which is a long-term problem.”
Why Does the Bond Market Drop Affect the Stock Market? – Tech Stocks Are Hit First, but It’s Not the Worst Yet
Why does a rise in bond yields cause the stock market to fall? Because funds shift between stocks and bonds:
- Tech stocks are most sensitive: The valuations of tech companies (such as Apple and Microsoft) depend on future profits. When long-term bond yields rise, the present value of those future profits decreases, leading to a decline in tech stocks and causing the U.S. stock market to fall for three consecutive days. The Asia-Pacific region has also been affected, with the Korean index falling nearly 6% and the Nikkei dropping more than 3%.
- But we haven’t reached the critical threshold yet: Experts say that the current 10-year U.S. bond yield (around 4.7%) is not high enough to cause a large-scale shift of funds from the stock market to bonds. For example, analysts at Strategas believe that funds will only flow out of the stock market when interest rates rise significantly enough to compete with stocks. Currently, the stock market is experiencing a rotation—some sectors are falling while others are rising, and the internal structure is still improving, so there’s no major issue for now.
Who Else Is Affected Besides the Stock Market? – The Real Estate Market Is Under Pressure
Long-term bond yields directly affect mortgage rates:
- 30-year mortgage rates are rising: The 30-year U.S. bond yield has reached a 2007 high, which means that 30-year mortgage rates will also increase. Homebuyers have to pay more in interest; for example, if you used to pay $50,000 in annual payments on a $1 million loan, you might now have to pay $60,000, naturally reducing the demand for homes.
- The real estate market is already under pressure: Rising mortgage costs will increase the pressure on housing prices and make it harder for developers to obtain financing (due to higher borrowing costs), affecting the entire real estate sector.
What Will Happen in the Future? – How Much More Do Rates Need to Rise to Hurt the Stock Market?
Experts believe that:
- The threshold for interest rates is higher than before: In the past, a 10-year U.S. bond yield of 4.5% would cause the stock market to fluctuate, but this “pain point” has now risen. For example, during Japan’s stock market bubble in 1989, bond yields rose from 4% to 8%; during the U.S. internet bubble, they rose from 4% to 7%. It’s not certain that we will reach 7%, but it’s definitely higher than 4.5%.
- The risk lies in the stock market ignoring rising rates: If interest rates continue to rise while the stock market keeps going up, it indicates that the market is becoming immune to risks, which is when things can get really dangerous. However, since there hasn’t been a more intense sell-off in the bond market yet, the stock market is not likely to experience a significant correction for now.
In summary, in the short term, the bond market sell-off will continue, and the stock market will be volatile. In the long run, unless the U.S. fiscal deficit is addressed, bond yields are unlikely to fall, putting more pressure on both the stock market and the real estate market.
(The entire text is explained in plain language to make it easy for non-financial professionals to understand.)