Why bonds are going crazy

It’s time to talk bonds again, dear Intriguer.

Why? Because when financial markets sh** their pants then pretend like nothing happened, we have to know what happened. Was it a virus? A scare? Bad shrimp?

So here’s a recap, using Bond film titles for guidance.

• For Your Eyes Only

A super quick bonds recap: governments borrow cash by selling bonds, which are basically promises to repay that cash with interest (aka ‘yield’).

But when broader rates rise, existing bonds don’t look so attractive and their price drops. That’s why bond prices and yields always move in opposite directions.

And this week, investors have been ditching their 30-year bonds, driving yields up:

• US yields tipped back over the feared 5% mark

• UK yields were at their highest since 1998

• French yields hit another 14-year high, and

• Even Japan's famously low yields hit a new top! 

But why are investors selling their bonds? Because trust is in…

• Skyfall

Investors are losing faith that governments are still willing or able to a) balance their budgets, and b) tackle inflation.

Sure, countries that issue their own currency (the US, Japan, the UK etc) can just create the money to pay back bonds — not an option for others (like France, using the euro).

But either way, if markets lose faith in government budgets, investors assume all the inevitable money creation will just fuel inflation and weaken the currency — and no investor wants to get repaid in a weaker currency getting eroded by inflation.

So investors start demanding higher interest (yield) to hold longer-term debt (bonds).

But why are investors losing faith in governments? It partly relates to the…

• Spectre

… of domestic politics, with various messes in Japan (the PM might not survive the year), France (another no-confidence vote on Monday), and the UK (six PMs in 15 years).

And when you’re busy just surviving each day, it doesn’t leave a lot of bandwidth for those tough but necessary budget calls (raising taxes / cutting spending). Even the UK’s Starmer — enjoying a solid majority — is facing real doubts around his autumn budget.

Throw in the US — with Musk’s DOGE cost-cutting falling way short, Trump’s tariff revenue getting ruled illegal, and spending still rising — and bond investors get jittery.  

Still, markets managed to calm down a bit by Wednesday, thanks to…

• The Man with the Golden Gun (aka Fed Chair Jerome Powell)

He didn’t do anything Wednesday, but markets are now 100% certain he will do something at the next Fed interest rates meeting on the 17th. Why?

Wednesday’s worse-than-expected US job numbers vindicated his Jackson Hole hint — the bigger US risk is now around jobs rather than inflation, meaning the Fed will cut rates.

And as you’ll recall from above, lower rates and lower inflation both encourage investors to pile back into bonds, which is what just happened, cooling yields.

And so what was that whole pants incident after all, dear Intriguer? A virus? A scare? Bad shrimp? We’d say it’s looking more and more like a virus (the structural problems above), meaning this week’s cyclical cleanse might not be the long-term cure.

And that leaves us wondering if global bond markets will just (sorry) Die Another Day.