Bond market ructions

By Carmel Crimmins, Reuters Econ World podcast host

Hello there,

Is it too late to say Happy New Year?

It already feels like we are well into 2025 and it's not even Groundhog Day (Feb 2) yet … Although there are strong Groundhog Day feels about the news right now.

Take the UK for example, it's dealing with soaring gilt yields and a falling pound. The market moves have prompted comparisons with the 2022 "mini-budget" crisis that forced former prime minister Liz Truss out of Downing Street.

But this week's selloff has been less severe and there has so far been no evidence of the kind of strain on institutional investors that forced the Bank of England into emergency bond purchases in 2022.

That's not to say events aren't heaping pressure on Finance Minister Rachel Reeves. Investors appear to be questioning the credibility of her budget plans and with UK borrowing costs rising, she may have to cut future spending to appease them.

The UK is in the eye of a wider storm hitting global bond markets. Concern about rising inflation and what that means for interest rate cuts as well as uncertainty over U.S. President-elect Donald Trump's policy plans and the prospect of trillions of dollars in extra debt sales have sent bond yields soaring around the world.

The benchmark 10-year U.S. Treasury yield has eased back a touch but overnight it hit a peak of 4.73%, which was the highest level since April 2024 and the U.S. 'term premium' - the extra payment investors demand for lending long to Uncle Sam rather than rolling over shorter-term debt - is the highest in a decade.

As Reuters columnist Mike Dolan points out, the Fed can either cool long-term inflation fears or acquiesce to Trump's complaints about interest rates being "far too high." It will likely opt to deal with the former, potentially setting the stage for a long-running verbal battle with the White House this year.

Federal Reserve Vice Chair of Supervision Michael Barr's decision to resign early from his regulatory oversight role sets up an early test of how Trump will try to shape the central bank during his second term as president.

With inflation back as a worry and geopolitical tensions on the rise, it's no wonder that gold is such a hot commodity on financial markets. I dig into its rally on this week's episode of Reuters Econ World. Listen here.

While all the other major bond markets zig, China is zagging. Bond yields there are falling as policymakers fight deflation. Data today showed China's consumer prices barely rose in 2024 while factory-gate prices extended into a second straight year of declines, weighed by persistently weak domestic demand.

As my colleague Jamie McGeever notes this week, China now boasts lower long-term bond yields than Japan, the former poster child for deflationary economic stagnation. This may signal that the "factory to the world" faces the real risk of "Japanification."

As always, I'd love to hear from you by hitting reply on this email or finding me on LinkedIn.  

A look at how debt servicing costs have risen for the world's big economies since the pandemic and the end of the near-zero interest rate era. The UK is now at a rate similar to Italy but the climb in costs has risen most steeply for the United States.

" The big milestone that people are looking at right now is $3,000 an ounce, which if you think about gold being at something like $267, when I first started reporting it. It's mind boggling." 

Veronica Brown, Global Industry Editor for metals and mining, talking about the gold rally.

On this week's show, we go deep on "Gold." In particular, what's driving the surge in gold prices and whether the rally can last. Listen here.

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