Global Bond Market Divided Amid Record Issuance, Rising Yields

The global bond market is currently experiencing a significant divide, with some regions witnessing enthusiastic subscriptions while others are facing massive sell-offs. This dichotomy is driven by governments in multiple countries being forced to raise significant funds in an environment of high debt and high interest rates. Investors, while chasing high-yield products in the short term, are increasingly concerned about the overall risks in the bond market, leading to a paradoxical situation where some bonds are being eagerly subscribed to while the market as a whole is experiencing a decline.

On a single day, the European bond market saw a record-breaking issuance, with 28 issuers planning to raise at least 496 billion euros, potentially surpassing the previous record of 476 billion euros set earlier this year. This surge in supply reflects the traditional September rebound trend, as governments and corporations return to the market after the summer break, aiming to complete their financing needs for the remainder of the year. Despite rising borrowing costs, banks and corporations are actively entering the market, driven by the influx of investment funds into bond funds over the summer. Additionally, corporate bond spreads have slightly recovered from their historical lows in August.

In Europe, particularly in the United Kingdom and Italy, massive bond transactions have been launched, marking the start of the September financing wave after a sluggish summer. High yields have attracted investors, leading to substantial subscriptions. The United Kingdom successfully issued a record 10 billion pound 10-year government bond, receiving over 140 billion pounds in subscription orders, ultimately raising 14 billion pounds. International buyers, including many central banks, accounted for 40% of the allocation, reflecting strong demand. Italy's joint issuance of 13 billion euros in 7-year bonds and 5 billion euros in 30-year bonds attracted over 218 billion euros in subscription demand. French corporate borrowers continued to raise funds ahead of the government's confidence vote the following week, with Unibail-Rodamco-Westfield issuing 6.85 billion euros in hybrid perpetual bonds.

Outside Europe, Saudi Arabia's planned issuance of five-year and ten-year Islamic bonds attracted approximately 15 billion dollars in orders, aimed at covering the fiscal deficit and supporting the "2030 Vision" diversification plan. In Japan, at least seven companies initiated dollar bond sales, with this week expected to be one of the busiest for global debt issuance. Japanese issuers are on track to surpass 100 billion dollars in total issuance for the year in both dollar and euro bonds.

However, the global bond market remains under pressure. Persistent inflation, concerns over fiscal discipline, and the dense issuance of government bonds have raised fears of oversupply, driving up yields and depressing bond prices. Long-term bond yields in multiple countries have surged to high levels. Japan's 20-year bond yield reached its highest level since 1999, while Australia's 10-year bond yield returned to its highest level since July. The United Kingdom's 30-year bond yield briefly hit its highest level since 1998. The U.S. benchmark 30-year bond yield is nearing the closely watched 5% threshold.

The sell-off reflects traders' concerns over high government spending and its potential inflationary impact. The large-scale issuance of corporate bonds on Tuesday, along with ongoing doubts about the Federal Reserve's independence, further increased market pressure. The steepening yield curve is expected to become the new normal, as deficits and debt issues are not easily or quickly resolved. The Bloomberg Global Bond Return Index fell 0.4% on Tuesday, the largest single-day decline since June 6, highlighting the market's continued caution towards holding long-term debt. The sell-off in long-term bonds has also driven demand for "steepening trades," a strategy that profits from widening yield differentials between short- and long-term bonds. Recent examples have shown that this trade can be profitable.

As pressure mounts for the Federal Reserve to cut rates, traders typically buy short-term bonds, which are most sensitive to changes in monetary policy. Fund managers are positioning for two-year U.S. Treasuries to outperform ten-year Treasuries. The manager noted that inflation is being stubbornly pulled back to target levels, fiscal pressures remain significant, and the labor market is generally stable, while central banks are beginning to cut rates in this context. The manager prefers to increase rather than reduce positions.