After selling US Treasuries, sell Japanese bonds; after selling Japanese bonds, sell European bonds

The global bond market is experiencing a "domino effect" sell-off!

On June 5th, the European Central Bank lowered interest rates as expected, but ECB President Christine Lagarde's statements completely changed market expectations. She clearly stated that the central bank is approaching the end of the monetary policy cycle and may raise future growth forecasts, which instantly prompted traders to reposition.

As the market quickly digested the expectation that the ECB might pause its easing measures, the two-year government bond yields of most Eurozone member countries rose by at least 5 basis points. Following the sell-off in U.S. and Japanese bonds, the European bond market also faced a wave of selling.

Analysts point out that the contagious nature of this round of global bond market sell-off is worth noting. Although the U.S. bond market rose on Wednesday due to weak employment data raising expectations for a Federal Reserve rate cut, and somewhat supported the Japanese bond market on Thursday, this cross-market "sympathy effect" clearly cannot last. When European bonds began to plummet, the "domino effect" in the global bond market re-emerged.

Global Bond Market Sell-Off in Turn

On Wednesday, the U.S. "little non-farm" unexpectedly weakened, raising expectations for a Federal Reserve rate cut, and U.S. Treasury bonds rose that day. On Thursday, demand for Japan's 30-year government bond auction hit a two-year low, but investors remained calm about the auction results on Thursday, and Japan's longer-term bonds continued to rise earlier.

According to Wallstreetcn's previous mention, part of the reason was that earlier U.S. employment data was weaker than expected, leading to a rise in U.S. Treasury bonds. This raised hopes for a Federal Reserve rate cut, which could help boost the bond market.

However, by Thursday evening, the ECB President's clear statement about nearing the end of the rate cut cycle triggered a sell-off in the European bond market, which also affected the U.S. bond market, despite the weak U.S. employment data that should have supported U.S. bonds.

On Thursday, the weak initial jobless claims in the U.S. should have provided a breather for U.S. bonds. According to Wallstreetcn's previous mention, last week, the number of first-time jobless claims unexpectedly rose to an eight-month high, prompting traders to move the timing of the Federal Reserve rate cut from October to September. The two-year U.S. Treasury yield briefly fell but then quickly rebounded, ultimately rising by more than 5 basis points.

Krishna Memani, Chief Investment Officer of Lafayette College, stated: "The economy is slowing down, and hard data is softening. There is a substantial trend of economic slowdown, which provides a path for the Federal Reserve to cut interest rates in the second half of this year."

Central Bank Monetary Policy Divergence Reshapes Capital Flows

Analysis points out that the transatlantic bond sell-off, from the European bond market to the U.S. bond market, highlights the impact of monetary policy divergence between regions. Hussain Mehdi, Director of Investment Strategy at HSBC Asset Management, noted:

"Market pricing now shows a significant gap between the interest rate cut expectations of the European Central Bank and the Federal Reserve in 2025."

After European Central Bank President Christine Lagarde's speech, the money market reduced expectations for an interest rate cut by the European Central Bank, now anticipating a cut of about 25 basis points by the end of the year, down from a previous expectation of 30 basis points. Currently, the market bets on a 100% probability of a 25 basis point rate cut by the Federal Reserve in September, with the full-year rate cut expectation adjusted from 56 basis points to 60 basis points.

However, more critically, the Trump administration's tariff agenda continues to push up short-term inflation expectations. As Mehdi stated: "The Federal Reserve remains constrained by inflation and faces supply shocks from tariff increases, which may keep U.S. Treasury yields sticky."

Additionally, U.S. Treasuries still struggle to shake off investor concerns about the U.S. fiscal outlook. The yield on 30-year U.S. Treasuries has risen more than 20 basis points since the end of April, catalyzed by Moody's stripping the U.S. of its last AAA rating and the House passing a multi-trillion dollar bill to extend tax cuts.

Mohit Kumar, Chief European Strategist at Jefferies International, pointed out: "Concerns about U.S. fiscal policy will prevent any meaningful rebound."

The market is currently holding its breath for Friday's May non-farm payroll report, which is expected to show an increase of 125,000 jobs, down from 177,000 in April. Gregory Faranello, Head of U.S. Interest Rate Trading and Strategy at AmeriVet Securities, stated:

Only job growth below 100,000 can drive U.S. Treasury yields to new weekly lows.

Analysis indicates that in this process of central bank monetary policy divergence, bond investors find themselves at a dangerous crossroads: facing abrupt turns in central bank policy, digesting contradictory signals from economic data, and enduring the long-term threat of fiscal deficits.