Turbulence in global bonds and a steady beat in US earnings
If you’re tracking equities, it’s vital to keep an eye on the bond markets, as they’re signalling genuine unease. That nervousness is now rippling through global economies.
Just look at the past couple of weeks: Japan’s Prime Minister Shigeru Ishiba stepped down after his party’s weak election showing, and France’s François Bayrou was ousted in a no-confidence vote. Both leaders were trying to hold the line on fiscal discipline, and their demise signals to the bond vigilantes – those eagle-eyed investors who punish loose spending – it’s time to be concerned.
Unsurprisingly, yields on long-term Japanese government bonds hit levels unseen since 1999, and French debt is under even heavier pressure from a massive savings plan that’s raising borrowing costs.
This isn’t isolated. We’re also seeing broader disarray in global bonds, that’s worth noting.
First, International Monetary Fund (IMF) bailouts are creeping back into speculative conversation. Indeed, according to reports, France’s finance minister hasn’t denied the possibility. The UK is dealing with similar whispers just a few years after their near-meltdown under Liz Truss. Meanwhile, German bund yields are at highs reminiscent of the early 2010s debt crisis, and some are suggesting they could surpass Italy’s. As an aside, Italy’s yield spread against Germany has actually tightened to the narrowest in 15 years. And while that might seem like a win for Italy, it is equally a red flag for Germany’s slipping credibility.
Then there’s the US, where President Trump’s tariffs and inflation fears have kept Treasuries on a rollercoaster. Thirty-year yields topped five per cent earlier this year in that mini-panic surrounding ‘Liberation Day’, and they’ve tested that level again amid a debt downgrade from Moody’s, the huge Republican budget deal, and attacks on the Fed’s independence.
Still in the US, and Treasury Secretary Scott Bessent’s wild idea to use crypto to buy back debt, isn’t constructive.
The big worry however is meddling with Fed Chair Jerome Powell or rushing in loyalists. When Erdogan undermined the Turkish central bank, cutting rates amid inflation, the Turkish people experienced 70 per cent inflation rates, in 2022. US Republicans undermining the Fed could erode trust, especially if it leads to ill-timed rate cuts that just fuel higher long-term rates. And everyone is also still haunted by 2008 and Europe’s 2010 Greece crisis.
In Japan, Prime Minister Ishiba’s exit after less than a year is causing consternation. He was considered the most conservative leader in many years, fending off tax cuts amid warnings that Japan’s finances were worse than Greece’s.
Now, with Japanese coalition partners pushing for stimulus amid US tariffs and slowing growth in the US and China, investors expect more spending – and more bond market jitters. JGB (Japanese bond) auctions have flopped badly this year, driving 20-year yields to 2.655 per cent, the highest in decades. The Bank of Japan’s at a crossroads too, with Governor Kazuo Ueda tightening amid 3.1 per cent inflation, but political pressure could force a pivot back to cuts as growth stalls at 0.7 per cent. The frontrunners to replace Ishiba – Shinjiro Koizumi and Sanae Takaichi – aren’t big reformers; they’re likely to double down on weak-yen policies and tax reductions, which could explode debt servicing costs on Japan’s massive 235-260 per cent GDP debt load.
All this matters because Japan is also the largest owner of US bonds.
Global bond volatility makes the US equity market’s strength somewhat perplexing but perhaps it can be explained by earnings (as well as AI-related optimism).
The S&P 500’s forward earnings hit its 16th consecutive weekly record. S&P500 Earnings per share are up 5.9 per cent from its low this year to $US292.92 per share. Consensus says earnings could reach $US300 by year-end. Most sectors are firing too, with nine of eleven sectors within two per cent of their earnings peaks. Looking ahead to the September quarter, equity analysts are estimating S&P earnings growth at 8.4 per cent year-on-year, suggesting analysts believe tariffs haven’t derailed the economy as much as feared. For equity investors, earnings resilience has therefore become a key anchor amid the bond storms elsewhere.
Nevertheless, bonds are flashing red on fiscal risks from Tokyo, Paris and Washington. Investors need to be alert, rather than alarmed.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.
Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
