The Bond Vigilantes have gone wild worldwide, pushing government bond yields higher in developed and emerging markets alike.
A month ago, we asked whether rising yields reflected stronger growth, higher inflation, or looming fiscal crises. We still think the answer is mostly growth. The exception is where government finances are weakest. There, bond investors are charging a fiscal-risk premium. France may be on the verge of a full-blown debt crisis.
Here's more:
I. Global Bond Yields
US Treasury yields rose on Friday even though September payrolls increased only 29,000. The 10-year US Treasury yield ended the week at 5.28%, after hitting its highest level since 2002 midweek (chart). Higher real yields account for nearly all of this year's increase, while inflation expectations have barely budged. In the UK and Australia, 10-year yields are higher still, at 5.37% and 5.36%. Japan's is 3.09% and still climbing.
The French government now pays more than Italy or Greece to borrow for 10 years (chart). The yield spread between the French and the German 10-year government bonds jumped on Thursday, when France unveiled a 2027 budget that freezes public-sector pay and most pensions to limit the budget deficit to 5% of GDP. The spread is now the widest since the Eurozone debt crisis of 2012. German yields fell last week as French yields rose. Inflation is running hot in both countries, so the gap reflects France's finances.
Six of the 22 bond markets on our list have seen 10-year yields climb 100bps or more this year (chart). France leads at 131bps, with the US second at 112bps. Italy, Indonesia, Japan, and South Korea round out the group.
Two-year government note yields are above central banks' official policy rates in all six economies on our chart, by as much as 107bps in the UK (chart). The gap is smallest in Australia, at 34bps. The Reserve Bank of Australia raised its cash rate by 25bps to 4.60% on September 29, its fourth hike this year.
II. Global Stocks
