US government bonds have suffered their worst month in four years as investors warned the world’s most important debt market has been gripped by a “vicious loop” of selling. US 10-year Treasury yields surged more than half a percentage point in September to 5.3 per cent, leaving them at the highest mark since 2007 and a whisker away from levels last seen in 2002. The scale of the move is unusual for a $32tn market that acts as an anchor for global finance.
The sell-off, initially driven by worries over US public debt and inflation, has now triggered waves of selling by funds, according to big investors and traders. They said a feedback loop had taken hold this week: yields rose to levels at which certain funds were obliged to sell Treasuries, setting off further bouts of bond sales that pushed borrowing costs higher. “It’s this vicious loop. And you have to wonder what is going to break it,” said Priya Misra, portfolio manager at JPMorgan Asset Management.
A report on Wednesday showing that personal consumption expenditures inflation, the Federal Reserve’s preferred price gauge, had held steady at 3.4 per cent in August against expectations of an increase to 3.7 per cent did little to soothe investors. US borrowing costs have been rising since the Iran war began in February as a sharp increase in energy costs has worsened inflation, which is toxic for bonds that pay fixed streams of interest payments over years. A borrowing binge by big AI companies, strong US economic growth forecasts and American public debt exceeding $40tn have also played a role in pushing up yields.
Among the big forced sellers of long-term Treasuries this week have been hedge funds and real estate investment trusts, said Matthew Scott, global head of trading at Alliance Bernstein. Daniel Gottlander, head of North America swaps trading at Citi, noted that the marginal buyer hasn’t shown up yet.
Source: Financial Times Markets · Summarized by HeadlinesBriefing