Global bonds have plummeted at an astonishing speed. The yields on 10-year Treasuries will likely surpass 5%, marking the first time since 2007, after rising to 4.85% this week. Global bonds are now down 3.5% in 2023, while the volatility of the ICE BofA MOVE Index for Treasury bonds reached its highest level since May on Tuesday. The average price of bonds in the Bloomberg U.S. Treasury Index has dropped to 85.5 cents on the dollar, just half a cent above the 1981 record low.

The relentless selling of U.S. government bonds is causing turmoil in major bond markets, as interest rates will likely remain high for an extended period. Australian 10-year yields have risen faster than their U.S. counterparts over the past week despite the local central bank holding its position, and volatility has also spilt over into equities.

These movements are starting to raise concerns across all asset classes. And as is often the case in such situations, emerging markets are the first casualties. Indeed, current yield levels in developed markets will draw capital away from riskier asset classes, as investors don’t need to take risks to generate attractive returns. This means many emerging countries must increase their risk premium to attract capital.

The pain also extends to corporate bonds, with at least two borrowers cancelling their bond issuances this week as yields on benchmark bonds reached a 2023 high of 6.15%. The insurance cost against default on a junk debt index has reached its highest level in nearly five months.
The shorter end of the Treasury bond market still looks attractive to some. A 52-week bill auction on Tuesday attracted record demand, with investors securing a yield of over 5% for the following year.

This turmoil has also propelled real yields to multi-year highs, with the inflation-corrected 10-year U.S. rate surpassing 2.4%, reaching levels last seen in 2007, just before U.S. stocks hit their peak. Sharp increases in real yields typically lead to downgrades in the stock market. And this brings back bad memories. The comparison of bond yields bears a frightening and regrettable resemblance to what it was 36 years ago. In financial circles, comparisons to 1987 are never welcome. The Black Monday crash in October remains one of the most terrifying days in financial market history.

One can also mention 2013. Indeed, the rise in real yields this year is now comparable to 2013, when the bond market collapsed after the Fed hinted it would limit the size of its balance sheet by buying fewer bonds. At this stage, the U.S. 10-year has gained as much as it did at the same time in 2013. As a reminder, the Fed ultimately decided not to reduce its bond purchases in September 2013, much to the markets’ relief. The lesson from this analogy would be that such a spectacular rise in yields should certainly prompt monetary authorities to be more lenient.

However, the equity market did not feel the pain yet. The real estate market will follow the bond market soon in a context of high inflation, geopolitical turmoils and a new global macrocycle. All the ingredients are there for the perfect storm.