As investors reduce their expectations for Fed rate cuts, the global bond sell-off is intensifying.

• The global bond yields have generally been increasing, with the U.S. 10-year Treasury yield reaching a new 14-month high of 4.799% on Monday.
• Market watchers said that the global selloff is being driven by a combination of fewer rate cuts and an increasing term premium associated with widening government budget deficits.

The global bond market is experiencing a sell-off, increasing worries about government finances and potentially leading to higher borrowing costs for consumers and businesses worldwide.

The global bond yields have generally been increasing, with the U.S. 10-year Treasury yield reaching a new 14-month high of 4.799% on Monday, as investors reevaluate the speed at which the Federal Reserve may reduce interest rates.

Since 1998, the 30-year gilt yields in the UK have been at their highest, and the 10-year yield recently reached levels not seen since 2008.

After ending its negative interest rates regime early last year, Japan has seen its 10-year government bond yield rise over 1%, reaching its highest in 13 years on Tuesday, according to LSEG data.

On Monday, India's 10-year bond yields increased the most in over a month in the Asia-Pacific region, reaching 6.846%, which is close to their 2-month highs. Additionally, yields on New Zealand and Australia's 10-year benchmark government bonds were also near their 2-month highs.

Despite the authorities' efforts to curb the surge, China's bond market has continued to soar, with the 10-year bond yield reaching a new low this month. In response, the central bank halted its government bond purchases last Friday.

What's going on?

Market watchers informed CNBC that bonds have been affected by a combination of factors.

As investors are now anticipating fewer rate cuts from the Fed than they did previously, they are demanding to be adequately compensated for the risk of owning bonds that mature well into the future, as they are concerned over large government budget deficits.

The Federal Reserve initially projected two rate cuts in 2025, but a hotter-than-expected U.S. jobs report on Friday has made the Fed's rate-cut path more uncertain, analysts said. Nonfarm payrolls increased by 256,000 in December, surpassing the 212,000 added in November and exceeding the Dow Jones consensus forecast of 155,000.

According to Ben Emons, founder of FedWatch Advisors, the U.S. economy is strengthening faster than expected, which means the Federal Reserve has less or no room to cut interest rates, and the bond market is reflecting that.

When interest rates increase, bond yields usually rise. Bond yields and prices have an inverse relationship.

The likelihood of a single cut in interest rates this year rose after the jobs report, as indicated by the CME Group's FedWatch indicator.

Steve Sosnick, Interactive Brokers' chief strategist, stated that they are only considering pricing in between one and two rate cuts following the release of last week's employment report.

The bond sell-off is being exacerbated by the increase in government deficits, which is leading to an increase in debt supply.

In December, the U.S. government recorded a deficit of $129 billion, which is 52% higher than the previous year. Meanwhile, the U.K.'s public sector net debt, excluding public sector banks, exceeds 98% of its GDP.

The unease around the UK's fiscal situation and the drop in pound sterling are causing gilt markets to sell off, according to CreditSights' senior strategist Zachary Griffiths.

A 'clarion call' for governments

Sosnick stated that the implications of higher yields on governments and corporations are not positive.

Analysts stated that higher yields increase the amount of money required for debt servicing, particularly for governments with persistent deficits.

This is where "bond vigilantes" emerge and demand higher interest rates to assume these massive debts, as stated by Sosnick.

Tony Crescenzi, an executive vice president at Pimco, stated that bond investors are urging fiscal authorities to control their budget paths to avoid further punishment.

The increase in U.S. yields makes it more challenging for some central banks to implement rate cuts in the near future, according to HSBC's chief Asia economist, Frederic Neumann, who cited the Bank of Indonesia's recent decision to maintain interest rates as an example.

An analyst from HSBC predicts that there will be a broad decline in the value of Asian currencies due to the increasing difference in bond yields between Asia and the U.S. This is causing capital to leave Asia and reducing the inflows of funds from other regions into the continent.

As government bond yields increase, so do the borrowing costs for businesses that use government bonds as a benchmark.

To attract investors, companies must offer a higher yield than government bonds, which increases their financial burden.

Sosnick stated that potential ramifications of corporate bonds not offering higher rates than government debt could result in lower profit or missed opportunities.

According to FedWatch Advisors' Emons, when yields rise and borrowing costs tighten, the dollar strengthens, causing equities to decline, which in turn affects consumer confidence, leading to a ripple effect on housing and retail spending.

Bond buying 'strike'

Market participants are now awaiting inauguration of U.S. President Donald Trump next week.

The "real test" will occur when Trump assumes office next week and issues executive orders on tariffs and immigration restrictions, according to industry observers.

Currently, G10 FX Strategy head Dan Tobon is observing a "buyer strike" in bond markets.

"Why take a leap of faith now when you'll have more information in a few weeks? The buyer strike is causing yields to rise aggressively," he said.

If the policies are perceived as inflationary or having negative effects on the budget deficit, the rout is likely to continue. However, if the policies are relatively modest, bonds could stabilize or even reverse.