Government bond markets under strain

Bryn Jones, head of fixed income at Rathbones Asset Management, said: “US Treasury yields have moved sharply higher following a much stronger-than-expected set of PMI readings, marking the largest rise in 10-year Treasury yields since the market volatility seen around Liberation Day in 2025.

“The data pointed to a reacceleration in US economic activity, with manufacturing PMI rising to 57.0 from 53.9 previously and ahead of expectations of 53.7. Services PMI was even stronger at 58.7, well above the 55.8 forecast, pushing the composite reading to 58.4.

“The strength of the data led investors to reassess the outlook for US interest rates, with Fed funds futures increasing the probability of a Federal Reserve rate hike in October to around 89 per cent.

“The move triggered a broad sell-off across the US Treasury market, with yields rising across the curve. Demand at the latest five-year Treasury auction was weak, while five-year Treasury yields climbed to their highest level since 2007.

“The pressure was not confined to the US Government bond markets across Europe also came under strain, with German Bund yields moving higher and French government bonds underperforming.

“In the UK, gilt yields continued to rise following the Bank of England’s quantitative tightening announcement, reflecting concerns over the growing supply of government debt and the prospect of rates remaining higher for longer.

“Asian markets were similarly affected. Japanese government bond yields moved higher overnight, with the 10-year yield reaching 3.07 per cent, its highest level since 1996.

“As a result, the average yield on the global government bond index is now approaching four per cent, highlighting the extent of the repricing taking place across fixed income markets.

“Adding to the pressure on bond markets has been a renewed rise in oil prices. Hopes of a breakthrough in negotiations between the US and Iran have faded, while concerns over potential restrictions on diesel exports have added to inflation worries.

“Together, these developments are reinforcing expectations that central banks may need to keep monetary policy tighter for longer than previously anticipated.”