Global government bond markets are beginning the week with renewed divergence. US and European sovereign bonds are rallying following weaker-than-expected US employment data, while Japanese yields continue to rise as the Bank of Japan progresses with monetary policy normalization.
US Treasuries are rallying modestly after September payrolls came in weaker than expected, reducing near-term expectations for additional Federal Reserve rate increases. The 10-year Treasury yield stands at 5.258%, while the 2-year has declined to 4.798% and the 30-year to 5.618%.
The yield curve continues to steepen at the long end, extending a move that has now lasted for a second consecutive week. Capital Economics attributes the increase in term premium to fiscal deficit concerns, geopolitical risks, and weaker institutional demand, although it continues to expect long-term yields to decline eventually.
US credit markets remain comparatively composed. Investment-grade spreads stand at approximately 82 basis points, while high-yield spreads are around 306 basis points, suggesting that investors are not yet pricing significant credit stress.
European sovereign bonds are also rallying. Germany's 10-year Bund yield has fallen to 3.429%, while the 2-year has declined to 3.020% and the 30-year to 3.803%.
The European Central Bank remains cautious, with the outlook for both growth and inflation characterized by considerable uncertainty. France represents a more specific source of risk. Japanese investors hold an estimated ¥23 trillion, or approximately $145 billion, of French bonds, significantly above benchmark weightings. This creates the possibility of additional selling pressure should Japanese investors begin reallocating capital.
Political uncertainty is also elevated, with Spain reportedly moving toward an early election following a parliamentary defeat.
UK Gilts are broadly unchanged. The 10-year yield stands at 5.366%, the 2-year at 4.817%, and the 30-year at 5.891%, leaving the UK with the highest long-end sovereign yield among the G7 markets covered.
The UK curve remains notably steep, with approximately 107 basis points separating the 2-year and 30-year yields. Elevated oil prices continue to keep inflation expectations high, leaving the Bank of England with a difficult trade-off between supporting economic growth and maintaining credibility on inflation. The softer US employment data provides some relief by reducing global expectations for additional monetary tightening.
Chinese government bonds remain characterized by exceptionally low yields. The 10-year CGB stands at 1.678%, while the 2-year yields just 1.244%.
The approximately 358-basis-point gap between Chinese and US 10-year yields remains historically wide, reflecting weak domestic demand, continued property-sector difficulties, subdued credit growth, and an accommodative PBOC policy stance.
Japan is moving in the opposite direction from US and European markets. The 10-year JGB yield has increased to 3.098%, while the 2-year stands at 1.921% and the 30-year at 4.231%.
The long end is experiencing the greatest pressure as the Bank of Japan continues its gradual policy normalization. The possibility that Japanese investors could repatriate capital from overseas bond markets adds another structural dimension, particularly given their significant exposure to European sovereign debt.
