Global fixed-income markets came under renewed pressure over the week as hawkish central bank commentary pushed yields higher across the United States, Europe, the United Kingdom, and Japan. China remained the notable exception, with its government bond market largely insulated from the global repricing.
US Treasuries sold off on a net basis, with the greatest pressure concentrated at the front end of the curve. The 2-year Treasury yield increased 17.1 basis points to 4.348%, the 5-year rose 14.4 basis points to 4.481%, and the 10-year climbed 9.1 basis points to 4.722%. The 30-year yield increased more modestly to 5.209%.
This resulted in a classic bear-flattening move, with the 2-year/10-year spread narrowing from approximately 45 basis points to 37 basis points.
The week initially started positively for Treasuries, as lower oil prices and optimism surrounding Middle East de-escalation eased near-term inflation concerns. A $69 billion 2-year Treasury auction also produced a fourth consecutive strong result.
Conditions changed later in the week. A $70 billion 5-year auction delivered its tenth consecutive weak result, before Fed Chair Kevin Warsh's Jackson Hole speech on Friday fully reversed the week's earlier bond gains. His warning that inflation is not meaningfully slowing and that the Federal Reserve has "work to do" drove the 2-year yield sharply higher and pushed the 10-year back above 4.70%.
European government bonds followed a similar trajectory. Germany's 2-year Bund yield rose 9.4 basis points to 2.906%, while its 10-year yield increased 7.8 basis points to 3.279%. French and Italian 10-year government bond yields also increased, reaching 4.127% and 4.099% respectively.
The European move was amplified by hawkish commentary from ECB Executive Board member Isabel Schnabel, who argued that rates must rise further given the resilience of the Eurozone economy and the likelihood that energy-driven inflation will remain above target for an extended period.
Despite renewed French political uncertainty, the spread between French and German government bonds remained broadly stable. The Italian-German spread widened only modestly, providing little indication of acute sovereign stress.
UK Gilts also experienced a bear-flattening move. The 2-year yield increased 9.4 basis points to 4.406%, while the 10-year climbed 7.5 basis points to 5.063% and the 30-year reached 5.781%. The 10-year Gilt therefore ended the week above the psychologically significant 5% level.
Markets had already increased expectations for Bank of England tightening early in the week, with approximately 30 basis points of additional tightening priced by year-end. Friday's global rates repricing added further pressure.
China remained the major exception. The 2-year Chinese government bond yield increased just 0.8 basis points to 1.254%, while the 10-year rose only 1.2 basis points to 1.696%. The People's Bank of China's accommodative policy stance and strong domestic institutional demand continue to anchor yields at historically low levels, effectively insulating the market from the broader global selloff.
Japanese government bonds also weakened, particularly following Friday's developments. The 10-year JGB yield increased to 2.931%, while the 30-year rose to 4.123%.
The most significant domestic event was a weak 2-year JGB auction, which recorded its lowest demand since 2016. The result increased pressure on the Bank of Japan to communicate its policy intentions more clearly ahead of upcoming 10-year and 30-year auctions. Fiscal concerns are also increasing, with ministry budget requests expected to exceed ¥130 trillion for the next fiscal year, potentially setting a new record.
Overall, global bond markets experienced a renewed hawkish repricing during the week. US and European yields rose following central bank commentary, UK yields remained elevated, and weak Japanese auction demand added to pressure on JGBs. China remained the clear outlier, with accommodative policy continuing to anchor its sovereign bond market.
