By Yoruk Bahceli and Junko Fujita
LONDON/TOKYO (Reuters) -A degree of calm settled on the world’s biggest bond markets on Wednesday, but concerns about the fiscal health of big economies from Japan to Britain and France 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.
“The economic reforms needed to really cover increasing debt are lacking, and the capital market sees that,” Deutsche Bank chief executive Christian Sewing said at a conference on Wednesday, referring to the selloff in long-dated bonds.
“That’s why I always say that the capital market is a good reflection of the political reforms that need to be implemented. So we should take it as a bit of a warning and not just duck away and say that nothing will happen.”
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 Sept. 8 confidence vote he called in an attempt to win backing for an unpopular debt-reduction plan.
The U.S. Treasury market, considered the bedrock of the global financial system, meanwhile has also seen pressure from worries about high debt, the impact of tariffs on inflation and concern about the independence of the Federal Reserve.
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.
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.
U.S. 30-year Treasury yields meanwhile touched the closely watched 5% level that investors reckon hurts risk assets for the first time since mid-July.
When a bond’s yield rises, its price falls.
Analysts said that 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.
Markets nevertheless calmed down as London trade progressed, with euro zone bond yields last lower on the day. U.S. and UK 30-year yields having retreated from their highs.
A hefty pace of bond sales this week had pressured markets on Tuesday, analysts noted.
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 U.S. Federal Reserve rate cuts.
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,” he said.
(Reporting by Yoruk Bahceli, Junko Fujita, Rae Wee and Jaspreet Singh Kalra; Additional reporting by Tom Sims in Frankfurt; Writing by Dhara Ranasinghe; Editing by Bernadette Baum, Hugh Lawson)
