Global bond rout threatens equity party as risk-off sentiment takes hold

Overnight, Wall Street settled in the red.

The roaring rally seen in equity markets across the world might be coming to an end, as concerns in the debt market overshadow the equity-related optimism. Global bond yields have been on a steady uptick, with the U.S. 30-year yields surging past the 5 percent mark, while Japan’s 40-year yield has touched 3.5 percent.

The losses came as Trump’s sweeping tax and spending bill is passing through the U.S. Congress, which could significantly widen the federal deficit. Further, the U.S. Federal Reserve has remained steadfast, refusing to trim the interest rate amid inflationary concerns, which means the U.S. will pay lofty prices to service its debt. As a result, investors offloaded their bond holdings, causing yields to spike.

In Japan, the government bonds are soaring against the backdrop of ballooning debt, and an aging population. The market is now demanding a higher risk premium to hold long-dated Japanese debt, exposing the fiscal vulnerability that policy had long masked, noted Arsh Mogre, Economist, PL Capital.

Not just in the U.S., central banks’ key benchmark rates remain elevated across the globe, given U.S. President Trump’s tariff-related uncertainties, which are likely to spark inflation. Even following trade deals, the markets expect the trade-weighted average tariff rate to remain higher than before the imposition of the tariffs.

Rising bond yields pose a direct threat to equity valuations, as bonds offer solid risk-weighted returns compared to stocks, especially for risk-averse investors. The soaring yields sparked a sharp sell-off across Wall Street and Asian markets, as investors offloaded their holdings while a risk-off sentiment took hold.

The Dow Jones Industrial Average sank 1.91 percent, the broader S&P 500 slid 1.61 percent and the tech-heavy Nasdaq Composite declined 1.41 percent, with the three indices recording their worst day in one month.

Asian shares fell and Treasuries continued their slide on Thursday, May 22, following losses in Wall Street on concerns about the US’s ballooning deficit. Japan's Nikkei 225, South Korea's Kospi and Kosdaq, along with Hong Kong's Hang Seng index tumbled over one percent each in trade.

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