Global bond markets are experiencing a period of significant fragility and volatility. Governments around the world are finding themselves compelled to borrow heavily in an environment characterized by high debt and rising interest rates. While investors are chasing high-yield products in the short term, they are also worried about the overall risks facing bond markets in the long run. This has led to a paradoxical situation where the market is seeing enthusiastic subscriptions but also an overall decline in prices.

Record Bond Issuance in Europe

European bond markets saw a record single-day issuance volume on Tuesday, with 28 issuers planning to raise at least 49.6 billion euros ($57.7 billion), potentially surpassing the previous record of 47.6 billion euros set earlier this year. This surge in issuance reflects the need for European governments and corporations to finance their projects and refinance their debts in the current economic climate.

Fresh Selling Pressure Looms

Global bond markets are facing fresh selling pressure as inflation worries, debt issuance volumes, and fiscal discipline concerns erode investor confidence in what were once considered among the safest assets in the world. This pressure comes at a time of growing concerns about global economic stability.

Rush to Issue Debt in Europe

The UK and Italy are leading the charge in Europe with massive bond offerings, kicking off a busy September of financing after the summer lull. Despite lingering fiscal concerns in countries like France and the UK, high yields have attracted eager investors, driving massive oversubscriptions. On Tuesday, the UK raised £14 billion through a syndicated sale of a 10-year gilt, after receiving orders for over £140 billion. Dan Shane, head of European debt underwriting at Morgan Stanley, noted that international buyers accounted for 40% of allocations, including international central banks actively participating for reserve management purposes. He emphasized that the deal achieved a new issue concession of less than 1.5 basis points, demonstrating strong demand. Meanwhile, a joint offering of 13 billion euros of Italian 7-year bonds and 5 billion euros of 30-year bonds attracted over 218 billion euros in orders. French corporate borrowers are also continuing to tap the markets ahead of next week’s government confidence vote, with Unibail-Rodamco-Westfield issuing 685 million euros of hybrid perpetual notes.

Driving Forces Behind Record Issuance

This surge in supply reflects the seasonal trend of governments and corporations returning to the market in September after the summer break, seeking to complete financing in advance for the remainder of the year. Although borrowing costs have risen from last month’s lows, banks and companies remain keen to tap the market, buoyed by a near-constant inflow of investment funds into bond funds over the summer. In addition, corporate bond spreads have rebounded slightly from record lows hit last month.

Issuance Extends Beyond Europe

Outside Europe, Saudi Arabia attracted around $15 billion in orders for planned five- and ten-year Islamic bond issues, to plug fiscal deficits and drive its “Vision 2030” diversification plan. In Japan, at least seven companies have kicked off dollar-denominated bond sales, in what is expected to be the busiest week for global debt issuance, with total dollar- and euro-denominated sales by Japanese issuers on course to exceed $100 billion for the first time this year.

Bond Sell-Off Continues, Yields Spike

However, global bond markets remain under pressure. Persistent inflation, doubts about fiscal discipline, and heavy bond issuance by various governments are fueling market concerns about oversupply, pushing yields higher and weighing on bond prices. Long-term bond yields in many countries have spiked to high levels. Japan’s 20-year government bond yield rose to its highest level since 1999 on Wednesday, and Australia’s 10-year government bond yield also returned to its highest level since July. On Tuesday, the UK’s 30-year government bond yield rose to its highest level since 1998. Notably, U.S. Treasury yields have also moved higher, with the benchmark 30-year bond yield approaching the closely watched 5% mark. This sell-off reflects traders’ concerns about high government spending and its potential inflationary impact. Tuesday’s large corporate bond issuance and ongoing worries about the Federal Reserve’s independence have added to market pressure.

Gloomy Outlook

Andrew Ticehurst, a strategist at Nomura Holdings in Sydney, expressed pessimism about the situation, saying: “Deficit and debt problems cannot be easily or quickly resolved. Steeper yield curves will be the new normal.” Ultra-long bonds typically underperform in September. The Bloomberg Global Aggregate Bond Return Index fell 0.4% on Tuesday, its biggest single-day drop since June 6. While the decline was limited, it highlights continued market caution about holding long-dated debt.

Betting on Yield Curve Steepening

The sell-off in long-dated bonds has also fueled demand for so-called “steepener trades.” This is a strategy that profits from the widening gap between short- and long-term bond yields. Recent precedents have shown that this trade can be profitable. With increasing pressure for the Federal Reserve to cut interest rates, traders typically buy short-term Treasury bonds that are most sensitive to changes in monetary policy. Fund managers like Andrew Canobi of Franklin Templeton are positioning bets that two-year U.S. Treasury bonds will outperform 10-year U.S. Treasury bonds. Canobi explained: “Inflation is being brought back to target with difficulty, fiscal pressures remain significant, the overall labor market remains firm, and the central bank is starting to cut interest rates in this context. We are inclined to add to positions rather than reduce them.”