Bond market selloff jolts global investors as ‘tantrum’ hovers

By Amanda Cooper, Yoruk Bahceli and Gertrude Chavez-Dreyfuss

LONDON/NEW YORK (Reuters) -A sharp selloff in some of the world’s biggest government bond markets and a continued rise in the dollar sent shockwaves through financial markets, with the pain seen deepening as uncertainty grows over U.S. President-elect Donald Trump’s policies.

On Wednesday, the 10-year Treasury yield, underpinning trillions of dollars in daily global transactions, jumped to above 4.7%, their highest since April, and UK peers hit their highest since 2008.

Germany’s 10-year Bund yield rose on Wednesday as well to a more than five-month high amid accelerating euro zone inflation, and elevated bond supply. The yield, the euro zone benchmark, was last little changed on the day at 2.521%, after hitting 2.534%, its highest since July last year.

This unleashed a fresh wave of selling in currencies against the greenback, including sterling, which slid more than 1% before slightly recovering, and the euro, which was headed closer toward the $1 mark.

The S&P 500, which rallied post Trump’s win, has recently started to falter, although it has marginally recouped some of those losses.

Trump, in a press conference at Mar-a-Lago on Tuesday, decried high U.S. interest rates despite the Federal Reserve being in the midst of an easing cycle.

“Inflation is continuing to rage, and interest rates are far too high,” the president-elect said.

Central banks all but declared victory over inflation in 2024, but a number of metrics show price pressures are rising again.

Trump’s plans for higher trade tariffs, tax cuts and deregulation threaten to push up inflation and strain government finances, thereby also limiting the Federal Reserve’s scope to cut interest rates.

“What it really boils down to is the term premium: 85% of the rise in yields that we have seen since mid-September is accounted for by the term premium,” said Chip Hughey, managing director of fixed income at Truist Advisory Services in Richmond, Virginia.

“That is a reflection that fiscal policy uncertainty continues to climb as we head to the new administration being sworn in.”

Term premium refers to the expected excess return that investors earn by holding longer-dated U.S. Treasuries versus rolling over T-bills.

Hughey pointed out that the current term premium for the 10-year note is 54 basis points (bps), up from minus 29 bps in mid-September. This means that 10-year yields are 54 bps higher than what can be justified by Fed policy expectations.

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