Global bond markets stabilize, for now, as fiscal storm looms

By Yoruk Bahceli, Junko Fujita and Gertrude Chavez-Dreyfuss

LONDON/TOKYO/NEW YORK (Reuters) -A sense of calm settled on the world's biggest bond markets on Wednesday, but concerns about the fiscal health of major economies from Japan to Britain and the United States kept long-dated borrowing costs pinned near multi-year highs.

Worries about Japan's fiscal position were revived after Prime Minister Shigeru Ishiba's close aide said he intended to resign from his post, pushing Japan's 30-year government bond yield to a record high well above 3%.

That came a day after borrowing costs, which set the tone for lending rates for corporates and consumers, rose sharply in France and Britain while sterling tumbled, too.

A reshuffle of British Prime Minister Keir Starmer's top team of advisers on Monday renewed the focus on fiscal challenges given Britain's high levels of borrowing and slow growth. In France, Prime Minister Francois Bayrou is expected to lose a September 8 confidence vote he called in an attempt to win backing for an unpopular debt-reduction plan.

"There's a lot of renewed focus globally on the fiscal outlook and this seems to happen every couple of weeks. The UK and France were in focus yesterday," said Zachary Griffiths, head of investment grade and macro strategy at CreditSights in Charlotte, North Carolina.

"But I take comfort in the fact that in the U.S., the 10-year yield is pretty stable...and that suggests to me that things aren't falling apart. In general, I think the U.S. is actually performing rather well relative to other developed bond markets, at least from the 10-year point of view."

The U.S. Treasury market, considered the bedrock of the global financial system, has also seen pressure from worries about high debt, the impact of tariffs on inflation and concern about the independence of the Federal Reserve.

U.S. 30-year Treasury yields touched the closely-watched 5% level that investors reckon hurts risk assets for the first time since mid-July.

But the long bond yield backed off to trade 7.2 basis points lower on the day at 4.898% after data showed job openings fell in July, reflecting a softening labor market that reinforced expectations of an interest rate cut by the Federal Reserve later this month.

The benchmark U.S. 10-year had risen to a one-week peak on Tuesday, but was down 7 basis points the following day at 4.207%.

Britain's 30-year gilt yields briefly touched their highest since 1998 at around 5.75% and were last down 7 basis points on the day as some stability returned to bond markets.

Speaking to a parliamentary committee on Wednesday, Bank of England chief Andrew Bailey said it was important not to put too much emphasis on 30-year borrowing costs as such long-dated bonds are not currently being used to raise funds.

Euro-area bond yields fell too, although French 30-year borrowing costs held close to their highest levels since 2009 and German equivalents were near 14-year peaks. 

"The economic reforms needed to really cover increasing debt are lacking, and the capital market sees that," Deutsche Bank CEO Christian Sewing said at a conference on Wednesday, referring to the selloff in long-dated bonds.     

PRESSURE EVERYWHERE

Rising yields are a headache for governments that face higher spending needs and already hefty debt-servicing costs, just as they prepare to issue more bonds and face political obstacles to their efforts to get budget deficits down.

Britain said on Wednesday it would deliver its budget on November 26, as investors continue to speculate about tax rises that could dampen economic growth.

Analysts said fears the U.S. government may have to give up revenue from tariffs if they are deemed illegal have added to the pressure in the Treasury market.

"The current dynamic is further evidence that investor appetite for ultra-long paper clearly waned, not only from private investors but also from institutional players who typically provide a more stable demand base for this segment," said Dario Messi, head of fixed income research at Julius Baer.

A hefty pace of bond sales this week had also pressured bond markets on Tuesday, analysts said.

Fred Repton, portfolio manager at Neuberger, said Tuesday marked a record day for European bond sales just after investors had ramped up their bets on Fed rate cuts.

In the United States, at least 27 issuers tapped the high-grade corporate bond market on Tuesday, seizing on near-record tight borrowing costs and getting ahead of any market volatility sparked by the Fed's policy meeting later this month.

While that was likely a key driver of Tuesday's selloff, "market participants are again focused on deficits and political risk, and this theme is likely to continue far into the year," Repton said.

(Reporting by Yoruk Bahceli, Junko Fujita, Rae Wee, Jaspreet Singh Kalra and Gertrude Chavez-Dreyfuss; Additional reporting by Tom Sims in Frankfurt; Writing by Dhara Ranasinghe; Editing by Bernadette Baum, Hugh Lawson and Nia Williams)