Markets to feel ripple effect as pressure mounts on global bonds

New commentary from global financial advisory organisation, deVere Group, has warned investors of the impending ripple effect on other asset classes as pressure continues to mount on global bond markets.

According to chief executive, Nigel Green, investors should remain cautious of the spikes seen recently in benchmark long-term yields, as this could affect valuations across global equities, real estate and corporate credit, as well as property, emerging markets, growth strategies and technology stocks.

The 30-year US Treasury hit 5 per cent for the first time since July, before it eased just to 4.98 per cent; the UK’s 30-year gilt yield reached its highest point since 1998 at 5.75 per cent this week; and in Japan, the 30-year yield hit a new high of 3.29 per cent.

“The return of the 30-year US Treasury to 5% is a wake-up call.

“Investors need to act. Markets are confronting a perfect storm of enormous debt issuance, inflation that is proving sticky, and central banks that have stepped back from bond buying.

“The result is sustained downward pressure on long-term bond prices with global repercussions. The short-term trajectory points to further strain.

“Investors should be adjusting portfolios now. Long-duration assets may face more pressure, while areas such as energy, financials, and infrastructure appear better positioned to deliver returns in this environment.”

Green said this comes as global governments have returned to their usual “heavy” borrowing habits, at the same time as the demand from pension funds, insurers and central banks dwindles. This trend also coincides with concerns over global inflationary pressures and the true independency of central banks and monetary policy.

“The imbalance between supply and demand is striking. For years pension funds and insurers were reliable buyers of long bonds, while central banks absorbed vast amounts of issuance. This period has ended,” he said.

“Institutions are reducing exposure to duration risk and governments are leaning more heavily on private markets. This dynamic points to yields remaining elevated.

 “If markets come to believe that central banks are not fully independent, the cost of long-term borrowing is likely to increase further.

“The widening gap between 30-year and 10-year US Treasury yields, which is now the largest since 2021, suggests that pressure is intensifying at the long end of the curve.”

Green urged investors to exercise caution and rethink their portfolios to prepare for further bouts of volatility.

“Investors should be prepared for yields to stay high and for volatility to rise,” he said.

“Portfolios need to evolve for a world where governments are issuing record debt, inflation is sticky, and the long end of the market is under sustained stress.”