Analysts react to global bond selloff

SINGAPORE, Sept 1 (Reuters) – Japan’s benchmark bond yield hit the 3% level for the first time since 1996 on Tuesday amid a broad-based global bond selloff, underscoring how inflation, fiscal concerns and rate hikes are reshaping markets that once anchored global borrowing costs.

The latest sharp selloff follows renewed military attacks in the now six month U.S.-Israeli conflict with Iran, sending Brent crude futures above $91 per barrel and fanning inflation fears. 

Here are some comments from market analysts:

TAI HUI, APAC CHIEF MARKET STRATEGIST, J.P. MORGAN ASSET MANAGEMENT, HONG KONG:

“The stalemate in the Middle East risks pushing energy prices higher as we approach Q4. A decline in inventory and seasonal demand for fuel going into winter in the northern hemisphere means the direct impact on headline inflation around the world is to the upside. The U.S. administration’s foreign policies, such as sanctions against Iran’s trade partners and renewed tariff threats, are also potential triggers for rapid price increases.”

FRED NEUMANN, CHIEF ASIA ECONOMIST, HSBC, HONG KONG:

“Rising JGB yields not only reflect investor concerns over Japan’s fiscal outlook, with ambitious spending plans signalled for the coming years, but also global pressure on long-term funding costs. Many developed markets have seen their long-term funding costs rise, as borrowing needs from both the public and private sectors have increased. From this perspective the rise in JGB yields is not an outlier, though with greater public debt outstanding, Japan faces potentially greater pressure due to climbing debt servicing costs.”

SHIGETO NAGAI, HEAD OF JAPAN ECONOMICS, OXFORD ECONOMICS, TOKYO:

“The rise in long-term interest rates is driven by a combination of growing expectations of interest rate hikes – fueled by global inflation concerns – and worries about fiscal sustainability in major advanced economies. It is misleading to understand the rise only in the context of individual economy. Concerns about long-term interest rates in major economies are fueling each other across borders, leading to a global rise in interest rates.”

VASU MENON, MANAGING DIRECTOR OF INVESTMENT STRATEGY, OCBC, SINGAPORE:

“This is not particularly positive news for Japan’s public finances. Higher borrowing costs will increase the cost of servicing the country’s sizeable national debt, potentially constraining government spending as a larger share of revenue is directed towards interest payments.

From a market perspective, higher Japanese government bond yields could encourage Japanese investors to sell foreign assets and repatriate funds, creating some downward pressure on overseas markets. At the same time, reduced Japanese demand for foreign debt may contribute to higher government bond yields in major markets such as the US and Europe, with potential implications for both fiscal and monetary policy.”

MASAHIKO LOO, SENIOR FIXED INCOME STRATEGIST, STATE STREET INVESTMENT MANAGEMENT, TOKYO:

“A 10-year JGB yield at 3% is undoubtedly a milestone, but I would view it more as a normalisation story than a crisis story. Markets are repricing for a higher inflation regime, a higher neutral rate and growing confidence that the BOJ has further to go. Bond investors are looking at a combination of inflation risk, heavy supply and term-premium repricing. 

“The Middle East escalation matters less for geopolitics itself and more because oil back at $80 (range) raises the risk of stickier inflation heading into winter. Investors are increasingly demanding greater compensation to own duration as sovereign issuance and corporate funding needs compete for the same pool of capital.

“The other underappreciated factor is Japan. The story is not large-scale repatriation, but Japan gradually ceasing to be the marginal buyer of foreign bonds. Less incremental demand from one of the world’s largest pools of savings is helping push term premium higher globally. This is why the selloff feels more like a buyers’ strike than a sellers’ panic. Bond investors are less worried about growth and increasingly focused on inflation and supply.”

ANDREW LILLEY, CHIEF RATES STRATEGIST, BARRENJOEY, SYDNEY:

“I think really most of this selloff has been a re-assessment of Fed policy. I think the Fed hikes in September and I think it’s the beginning of the three-rate hike cycle at minimum.

“If they’re not hiking, term premia has to rise… and that sort of dynamic is a sign they’ve maybe let things get a bit ahead of them — it’s not a great position to be in. You don’t want to be in a state where if you don’t deliver a tightening, the market delivers half of one for you, because they think that you’re running a big risk.” 

RYUTARO KIMURA, SENIOR FIXED INCOME STRATEGIST, BNP ASSET MANAGEMENT, TOKYO:

“Through the rise in interest rates so far, the bond market has to some extent been sounding a warning against fiscal expansion. The U.S. government, too, has in effect been calling for a shift away from Abenomics and, to some degree, for a change in Japan’s expansionary fiscal stance. Despite that, the Japanese government’s budget-request amount for next fiscal year has swollen significantly. From the bond market’s perspective, I think there is now something of a sense of resignation — tinged with helplessness — about rising interest rates.

“On the other hand, with 3% being a psychological threshold, it may draw out a certain amount of demand. The 10-year JGB auction itself saw a high level of bids, so for the time being we could see yields move sideways somewhat around that level. But once that demand has been filled to some extent, we need to be alert to the possibility that upward pressure on yields could intensify further.”

EIJI DOKE, CHIEF BOND STRATEGIST, SBI SECURITIES, TOKYO:

“Long-term interest rates have reached 3%, but that is probably just a waypoint. BOJ rate-hike expectations are likely to put upward pressure on yields mainly in the short- to medium-term zone, while concerns over fiscal policy are likely to weigh particularly on the super-long sector. The long-term sector, which lies between the two, ends up facing upward pressure on yields from both sides.”

PRASHANT NEWNAHA, SENIOR RATES STRATEGIST, TD SECURITIES, SINGAPORE:

“It’s a genuine regime change. JGBs were the anchor for global fixed income for a long time. Now it has flipped. An extension to this selloff in JGBs could drive a repricing of global fixed income.”

“So while a lot of the market’s focus has centered on monetary policy and the trajectory of BOJ hikes, this push in 10-year yields to 3% could renew the market’s attention to fiscal. More broadly, a further rise in JGB yields would make carry trades less attractive and could drive a gradual re-allocation into Japanese assets.”  

(Reporting by Ankur Banerjee, Tom Westbrook, Rae Wee and Gregor Stuart Hunter in Singapore, Mariko Sakaguchi and Satoshi Sugiyama in Tokyo; Editing by Jacqueline Wong and Ronojoy Mazumdar)