Bond rout cools but mood cautious with long-term borrowing costs near highs

Long-dated government borrowing costs from Japan to Britain touched fresh multi-year highs on Wednesday on nagging concerns over the fiscal health of some of the world's biggest economies, although a degree of calm was returning after a sharp selloff.

The market has remained under pressure this year but faces fresh challenges given a number of developments worrying investors in high-debt economies as traders return from the summer holidays.

Britain's 30-year gilt yields briefly touched their highest since 1998 at 5.752%, before moving lower. This followed a price slump on Tuesday that also saw the pound tumble .


U.S. 30-year Treasury yields rose to the closely watched 5% level that investors reckon hurts risk assets for the first time since mid-July, while German yields rose to their highest level since 2011. When a bond's yield rises, its price falls.

Earlier, 30-year Japanese government bond yields jumped to a record high of 3.26% while 20-year yields rose to their highest since 1999.

"The current dynamic is further evidence that investor appetite for ultra-long paper clearly waned, not only from private investors but also from institutional players who typically provide a more stable demand base for this segment," said Dario Messi, head of fixed income research at Julius Baer. In Britain, Prime Minister Keir Starmer's reshuffle of his top team of advisers on Monday renewed focus on fiscal challenges given the UK's high levels of borrowing and slow growth. The government said on Wednesday it would deliver its budget on November 26, as investors continue to speculate about tax rises that could dampen economic activity.

In France, investors have been unnerved by Prime Minister Francois Bayrou's calling of a confidence vote on September 8 to win backing for an unpopular debt-reduction plan. He is expected to lose the vote. And in Japan, Prime Minister Shigeru Ishiba's close aide announced his intention to resign from his post, raising bets that Ishiba, who has resisted calls to quit over an election loss, may follow suit.

CALM FOR NOW? Markets nevertheless calmed down as London trade progressed, with euro zone bond yields last lower on the day. U.S. and UK 30-year yields retreated from their highs, with U.S. yields holding a touch higher on the day.

A hefty pace of bond sales this week had pressured markets on Tuesday, analysts noted.

Fred Repton, portfolio manager at Neuberger, noted that Tuesday had marked a record day for European bond sales just after investors had ramped up their bets on U.S. Federal Reserve rate cuts.

While that was likely a key driver of Tuesday's selloff, "market participants are again focused on deficits and political risk, and this theme is likely to continue far into the year," he said.

Investors were also cautious ahead of Friday's U.S. jobs data, which could again shift rate expectations. "If you get an upside for payrolls on Friday, then all the talk of a rate cut has to be unwound," said Kenneth Broux, head of corporate research, FX and rates at Societe Generale.

"If you do get a weak payrolls print on Friday it could actually bring a broader relief rally in the bond market."