By Dhara Ranasinghe and Joice Alves
LONDON (Reuters) -Signals from the world’s biggest bond markets point to more volatility as Germany, Japan and the U.S. prepare to sell long-dated bonds in early September – adding pressure to an already bruising year.
German and French 30-year government bond yields hit their highest levels since 2011 in August, Japan’s 30-year borrowing costs are at record highs and Britain’s long-dated bond yields are headed for their biggest monthly jump since December. When yields rise, bond prices fall.
Rising yields are a headache for governments that face higher spending needs and already hefty debt servicing costs – just as they prepare to issue more bonds.
Political uncertainty in France and concerns about Federal Reserve independence are among the factors making investors wary.
Japan is tipped to hike rates again, while other major economies including the U.S. and Britain face sticky inflation, which typically puts upward pressure on yields.
“Long-dated bonds are going to continue to be volatile,” said Justin Onuekwusi, chief investment officer at St. James’s Place. “There is too much uncertainty around debt sustainability.”
German and French long-dated bond yields are up around 15 and 27 basis points respectively in August, on track for their biggest monthly increases since March – when news of an unexpected German spending surge sparked a sharp selloff for bonds.
As governments ramp up issuance to fund spending, fixed income is losing appeal.
“The long end of yield curves offers little value,” said First Eagle’s Idanna Appio, citing fiscal constraints.
LOW GROWTH, HIGH DEBT
Global growth is forecast to slow to 3% this year from 3.3% in 2024, according to the International Monetary Fund, making it harder for countries to reduce debt.
While the bulk of this year’s bond sales have already taken place, analysts describe the next two months as still relatively busy. Societe Generale expects more than 100 billion euros ($117 billion) in European bond issuance in September and October.
Auctions last week of 10-year Japanese government bonds and 30-year U.S. Treasuries showed weak demand.
An auction of 20-year Japanese government bonds received bids worth 3.09 times the amount sold, lower than the ratio of 3.15 times at the previous auction in July.
Dutch pension fund sector reforms could further weigh on demand as the 1.7 trillion euros sector shifts to a defined contribution system from next year, meaning funds will have less need to buy longer-dated European debt.
“When you have more supply, you’ve got maybe an imbalance between supply and demand, and that’s also pushing up yields,” said Kenneth Broux, head of corporate research for FX and rates at Societe Generale.
FRANCE, UK UNDER PRESSURE
While U.S. fiscal fears have eased, worries over Fed independence mean investors are demanding a higher premium for holding Treasuries, analysts said.
In Europe, this week’s surge in France’s bond spread over Germany highlights the challenges politicians face when trying to fix ailing public finances. France’s Prime Minister Francois Bayrou has called a Sept. 8 confidence vote on his debt-cutting plan.
Evelyne Gomez-Liechti, multi-asset strategist at Mizuho said she favours Spanish bonds over French ones, citing its stronger economy.
As an autumn budget looms in the UK, finance minister Rachel Reeves is facing pressure to meet spending demands from stretched public finances. Britain’s borrowing costs led the way in Tuesday’s bond market selloff.
“This additional support from the central bank, at least when it comes to the UK and Europe, doesn’t seem to be coming.” AXA chief economist Gilles Moec said.
($1 = 0.8542 euros)
(Reporting by Dhara Ranasinghe and Joice Alves in London, Jaspreet Kalra in Mumbai; additional reporting by Lucy Raitano and Yoruk Bahceli; Graphics by Alun John; Editing by Elaine Hardcastle)
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